IT fund investors cheer 47% average returns in last one year amid equity market meltdown

At a time when almost all the mutual fund categories are bleeding with negative returns, investors of information technology funds have a reason to cheer.

Funds investing in information technology schemes have emerged as the best performers among the mutual fund categories in the past year. IT funds have given an average return of 47 percent, topping the returns charts across mutual fund categories, according to the return data on Value Research, a mutual fund research firm.

A depreciating rupee has proved to be a boon for the IT companies along with improved growth in the US economy which has led to to an increase in orders for Indian IT companies, according to mutual fund managers.

The proof of the pudding is in the eating.  Nifty IT Index rallied over 47 percent in the year-to-date.

Tata Consultancy Services, Tech Mahindra and Infosys have gone up 58-73 percent in the last one year while rupee has depreciated nearly 15 percent year-to-date to hit a record low of 73.41 against the US dollar on Oct 3.

In the last year to date: TCS has rallied 73 percent, Infosys 60 percent and Tech was Mahindra up 58 percent.

“Over the last one year, we have observed a major shift towards technology The allocation has gone up by almost 4 percent. There is increased interest among investors in some select technology stocks given improved outlook and depreciation in INR,” Morningstar said in a recent report.

Valuations of most IT stocks is already well over 20 times their forward earnings, surpassing historical averages by a wide margin. The fund managers are bullish about larger technology companies because of their stronger resilience and growth prospects.

OUTLOOKFund managers said IT companies having a large exposure to the US will continue to benefit the most as exports account for more than 50 percent of the sectors’ revenues. However, hedging strategies will be a deciding factor for these companies to make profits on a falling rupee.

“Rupee would continue to remain volatile due to rising crude leading to high CAD (current account deficit). This is further accentuated by global trade war between US and China and OMCs buying dollar to hedge their oil imports,” said Viral Berawala, Chief Investment Officer, Essel Mutual Fund.

Research house HSBC said hopes are high from IT companies which is reflected in their premium valuation. It believes Q2FY19 earnings should be decent but are unlikely to be an upside trigger.

September quarter earnings season will be kicked off by TCS on October 11 followed by Infosys on October 16.

“2-3 years demand visibility is decent and the rupee weakness provides a margin cushion,” HSBC said.