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Increased tariffs on Indian goods and services exports to the US, imposition of steep H1B visa application fee to the tune of USD 100,000 and now the proposal of linking wages to H1B visas instead of erstwhile lottery system have spooked the investment sentiment around the IT services company in India. No wonder, exchange traded funds tracking sectoral benchmarks - the Nifty IT Index are down 17% in CY2025. Compared to most of the diversified equity funds this is a severe underperformance. To put things into the right context - flexi-cap equity funds on the average have gained 2.5% in CY2025.
Could This Be the Right Time to Buy Tech Funds?
Though technology sector funds have been under pressure so far, this can be an opportunity in disguise. Before we get into why it may be a good entry point for medium term investors, let’s understand the impact of these moves on the sectors.
How Are US Policies Impacting Indian IT Companies?
Large Indian services companies derive most of their revenues from the US. Hence trade barriers and increased costs for carrying out business in the US means compressed margins for the Indian IT services companies. For effective service delivery, many of these companies are dependent on their staff based in the US using H1B Visa. Put simply, the IT services companies have to reinvent themselves. Technological breakthroughs in artificial intelligence and machine learning will also change the nature of demand for IT services in the US. There is a need to transform the services offering which requires restructuring of the talent pool of these IT services here in India as well as overseas. This period of transformation means pressure on revenues as well as on profit margins for the Indian IT companies. In this context, many investors are trying to avoid these stocks.
Why Investors Should Look Beyond IT Services Stocks
However, many tend to overlook the fact that listed names in the Indian technology sector are not limited to IT services companies. New age technology driven consumer companies which derive most of their revenues from domestic markets face little impact of the US tariffs. As the Indian digital ecosystem develops and tech-driven businesses grow, investors are expected to benefit. In the medium term, many of these tech-driven companies are expected to list on the Indian stock exchanges through the initial public offering route. This should further widen the tech-investing opportunities for Indian investors.
Can Offshoring Help IT Companies Regain Profitability?
Also, IT services companies may want to increase offshoring or near-shoring their staff that cater to US clients. Offshoring simply means tech-workers based in some other geographies (including India) to cater to the US clients, instead of through the staff based in the US. Increased offshoring may lead to significant cost reduction which in turn should enhance profitability for the IT services companies.
Are IT Stock Valuations Attractive Again?
Recent corrections in stock prices have addressed some of the excesses of the post covid bull market in tech-space. The valuations have come down. For example, the Nifty IT index quotes at the price to earnings multiple of 25.3 as on September 24, compared to five year average multiple of 28.9.
Why Tech Funds Still Make Sense for Long-Term Investors
This means investors are paying reasonable prices for companies many of which have a strong track record, a large addressable market and strong balance sheet backed by able management teams.
Which Technology Funds Are Worth Considering?
A few money managers have cut their exposure to the IT sector given the turbulent times. But savvy investors with risk appetite may want to invest in IT sector stocks. Technology funds offer a disciplined way to invest in this segment. Actively managed technology funds are better positioned to benefit from heterogenous offerings of the technology companies. High active share can help fund managers outperform sectoral indices such as Nifty IT index. Schemes such as White Oak Capital Digital Bharat Fund, SBI Technology Opportunities Fund and Franklin India Technology Fund can be effective means to invest in the technology sector.
What About Passive Tech Fund Options?
For passive investors schemes tracking Nifty India Digital Index are better placed compared to Nifty IT index. The former includes all names present in the latter and offers a wider exposure to the digital stocks, whereas the latter is a more concentrated index focusing on IT services companies.
How Much Should You Invest in Tech Funds?
These schemes should be considered as a part of satellite allocation of the portfolio, by only aggressive investors. Up to 5% of the equity portfolio can be in technology funds. Investors should ideally be investing using lumpsum and staggered investments routes. For example, 50% of the targeted investment should be done in one go and the rest should be deployed over the next three months using a systematic transfer plan. Investments should be done keeping in mind minimum five years time frame.
Disclaimer: This report is prepared in his personal capacity and neither the Author nor Money Honey Financial Services Pvt Ltd assumes any responsibility or liability for any error or omission in the content of the article. Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.