Best IT Sector Mutual Funds: ICICI Pru Technology Fund vs. Tata Digital India Fund
September 2, 2024 Mutual Fund
The Indian Information Technology (IT) sector has been one of the most remarkable success stories in India’s economic landscape. Its inception can be traced back to the early 1980s when companies like Tata Consultancy Services (TCS) and Infosys began to emerge, providing basic IT services and software development.
The IT sector’s growth was driven by India’s skilled, English-speaking workforce and competitive cost advantages, which attracted global companies to outsource their IT needs. During the 1990s and early 2000s, the sector expanded rapidly, fuelled by the rising demand for IT services and software exports. The 1991 economic liberalisation further boosted its global expansion. Today, the Indian IT sector is a major contributor to GDP, employment, and exports, establishing itself as a global powerhouse.
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During the COVID-19 pandemic, the Indian IT sector demonstrated remarkable resilience and adaptability. As global economies went into lockdown and businesses shifted to remote work, there was an unprecedented surge in demand for digital solutions, cloud computing, cybersecurity, and IT-enabled services.
Indian IT companies, known for their agility and innovation, were quick to adapt to the new normal. They implemented remote working models almost overnight, ensuring business continuity and uninterrupted service delivery to global clients. This adaptability allowed the Indian IT sector not only to survive but thrive during the pandemic.
Many companies reported double-digit growth rates and significant increases in revenues and profitability as they capitalised on the heightened global demand for digital transformation and technology services.
[Read: 5 Equity Mutual Funds to Benefit from India’s IT and Tech Boom]
The performance of the Indian IT sector during the pandemic had a profound impact on the Indian equity market. IT stocks became a safe haven for investors amidst market volatility, driven by their strong earnings visibility and growth potential. The sector’s strong performance bolstered investor confidence, leading to a rally in IT stocks on the Indian stock exchanges.
The Nifty IT Index, a sectoral index representing the performance of the top IT companies listed on the NSE, has been a standout performer amidst the COVID-19 pandemic. This index, which includes leading IT companies like Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies, and Tech Mahindra, among others, has shown remarkable resilience and growth during a period marked by unprecedented global economic disruption.
Graph: Thriving Performance of Indian IT Sector in the Past 5 Years
Data as of August 30, 2024
Do note past performance is not an indicator of future returns
(Source: ACE MF, data collated by PersonalFN Research)
The Nifty IT Index, reflecting the sector’s performance, witnessed a robust rally from the second half of 2020 onwards. The index rose significantly, driven by strong earnings reports, increased demand for digital services, cloud computing, cybersecurity, and IT infrastructure management. During the peak of the pandemic, the Nifty IT Index outperformed most other sectoral indices, underscoring the market’s confidence in the sector’s growth prospects amid heightened digital adoption.
However, in the current scenario, the Nifty IT Index has experienced some moderation after a period of exceptional growth. As global inflationary pressures mounted and central banks, including the Reserve Bank of India (RBI), adopted a more hawkish stance with interest rate hikes to curb inflation, there was a noticeable impact on investor sentiment.
For investors, the rise of AI, Fintech, and other digital technologies has renewed interest in IT stocks. With Indian IT companies actively investing in these areas, they are well-placed to benefit from the ongoing digital transformation across industries. As a result, many investors are now eyeing IT stocks as a key component of their portfolios, anticipating that the ongoing technological advancements will continue to drive strong performance in the years to come.
This article offers an in-depth comparison of two prominent IT sector mutual funds in India, ICICI Pru Technology Fund vs Tata Digital India Fund, to aid you in capitalise on the sector’s current momentum.
ICICI Pru Technology Fund is an open-ended equity scheme that belongs to ICICI Mutual Fund. It is a well-established sectoral fund focused on the Indian IT sector. Launched in March 2000, the fund has a long track record and has been a popular choice among investors seeking exposure to the IT sector.
The ICICI Pru Technology Fund aims to generate long-term capital appreciation by creating a portfolio invested in equity and equity-related securities of technology-dependent company companies. Currently, the fund holds an AUM of Rs 13,422.37 crores.
Tata Digital India Fund is an open-ended equity scheme and belongs to Tata Mutual Fund. It is another prominent sectoral fund focusing on the Indian IT sector. Launched in December 2015, the fund has quickly gained popularity due to its strategic approach to investing in the IT space and currently holds an AUM of Rs 11,377.32 crores.
Tata Digital India Fund aims to provide long-term capital appreciation by investing predominantly in equity/equity-related instruments of the companies in the Information Technology Sector in India. The fund adopts a thematic investment approach, targeting companies benefiting from the digital transformation trend.
Investment Style and Philosophy:
– ICICI Pru Technology Fund: focuses on investing in technology-driven companies that are poised for long-term growth. The fund’s investment philosophy revolves around identifying firms that are leaders in innovation and have a competitive edge in the technology sector. This includes companies involved in software development, hardware manufacturing, IT services, and other tech-driven fields.
The fund management team adopts a growth-oriented approach, prioritising firms that demonstrate strong earnings potential, solid business models, and sustainable competitive advantages. The aim is to capitalise on the rapid advancements and digital transformation across various industries, driving growth in technology stocks. Additionally, the ICICI Pru Technology Fund follows a diversified investment strategy to mitigate risks associated with the highly volatile technology sector.
– Tata Digital India Fund: is designed to provide investors with an opportunity to benefit from the digital revolution in India. The fund’s investment philosophy is centred around investing in companies that are driving digital innovation and transformation within the country. This includes sectors such as e-commerce, fintech, IT services, digital marketing, and other technology-enabled businesses.
Tata Digital India Fund aims to capture the growth potential of companies that are at the forefront of India’s digital economy, leveraging the country’s expanding internet user base, increasing smartphone penetration, and growing demand for digital services. The fund management team employs a bottom-up stock selection approach, seeking companies with robust fundamentals, strong management teams, and a clear vision for growth.
[Read: Investing in High-Risk Mutual Funds: A Bold Approach]
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Performance Comparison: Rolling Returns
Scheme Name Absolute (%) CAGR (%) 1 Year 3 Years 5 Years 7 Years 10 Years ICICI Pru Technology Fund(G)-Direct Plan 27.73 19.24 25.03 24.49 19.87 Tata Digital India Fund(G)-Direct Plan 31.70 20.91 24.99 25.88 – Category Average – IT Sector (Teck) 32.89 20.00 24.68 24.13 19.19 Benchmark – Nifty IT – TRI 22.81 14.07 20.11 21.33 16.26 Data as of August 30, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)The ICICI Pru Technology Fund and the Tata Digital India Fund have shown strong performance across various periods and are at par with the benchmark and category average, reflecting their robust strategies and the potential of the IT sector in India.
Over a three-year period, both funds have demonstrated consistent performance, with the Tata Digital India Fund achieving a CAGR of 20.91% compared to the ICICI Pru Technology Fund’s 19.24%. These returns also outpace the Nifty IT – TRI benchmark, which recorded a CAGR of 14.07% over the same period. This consistency indicates that both funds have effectively navigated the challenges of the technology sector, leveraging opportunities presented by the ongoing digital transformation across various industries.
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Looking at the five-year performance, the ICICI Pru Technology Fund edges slightly ahead with a CAGR of 25.03%, compared to Tata Digital India Fund’s 24.99%. While both funds have outperformed the benchmark index and the category average of 24.68%, their closely matched returns reflect similar investment philosophies, likely emphasising well-established tech giants as well as emerging technology firms. This period covers significant global and domestic market events, including technological disruptions and digital adoption trends, which these funds have navigated effectively to maintain their growth trajectories.
The Tata Digital India Fund has generally exhibited slightly higher returns over shorter and medium-term periods, while the ICICI Pru Technology Fund has shown robust performance over a longer-term horizon.
Do note the fortunes of these funds are heavily tied to the performance of the Indian IT sector. Any headwinds faced by the sector can significantly impact their NAV. Moreover, past performance should not be the only element, it’s important to note that one may consider other factors like portfolio holdings, risk profile, and investment philosophy before making a decision.
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Portfolio Composition: Asset Allocation of Schemes
The Tata Digital India Fund and the ICICI Pru Technology Fund are two prominent mutual funds in the technology sector, each with a distinctive asset allocation strategy.
Scheme Name Large Cap % Mid Cap % Small Cap % Tata Digital India Fund 71.06 12.11 15.04 ICICI Pru Technology Fund 65.39 11.03 15.49 Data as of July 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)Both Tata Digital India Fund and ICICI Pru Technology Fund focus on investing in companies under the IT segment, but their approach to diversification within that sector differs.
The Tata Digital India Fund has a substantial allocation to large-cap stocks, constituting 71.06% of its portfolio. This indicates a focus on established and financially stable companies, often leading to more consistent returns with relatively lower volatility. The fund also maintains a balanced approach, with 12.11% invested in mid-cap stocks and 15.04% in small-cap stocks.
The mid-cap allocation offers a blend of growth potential and stability, while the small-cap exposure provides opportunities for higher returns due to the growth potential of smaller, emerging companies. This diversified approach enables the fund to capture opportunities across different segments of the technology sector while maintaining a stable base in large-cap stocks.
On the other hand, the ICICI Pru Technology Fund has a slightly different allocation strategy. It has 65.39% invested in large-cap stocks, slightly lower than Tata Digital India Fund, reflecting a marginally lower emphasis on large-cap stability. The fund’s allocation to mid-cap stocks stands at 11.03%, which is similar to Tata Digital India Fund’s strategy, suggesting a balanced approach in this segment. However, the fund has a slightly higher allocation to small-cap stocks at 15.49%. This indicates a higher inclination toward capturing growth opportunities in smaller, potentially high-growth companies within the technology sector.
The technology sector has shown resilience and growth potential, driven by digital transformation, increased adoption of technology across industries, and government initiatives supporting the digital economy. While the Tata Digital India Fund’s approach may provide more stability in volatile market conditions, the ICICI Pru Technology Fund could offer higher returns if smaller tech companies perform well in the growing digital economy.
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Market Volatility: Risk Profile of Schemes
Investing in sectoral funds may offer benefits from the growth potential of the underlying sectors like – IT; however, understanding the scheme’s risk-reward profiles is crucial before investing.
Risk Ratio Tata Digital India Fund ICICI Pru Technology Fund Standard Deviation (3 Year) 19.35 18.77 Sharpe 0.16 0.13 Sortino 0.30 0.23 Data as of July 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)An investment with high volatility is considered riskier than an investment with low volatility; the higher the Standard Deviation, the higher the risk. Over the last three years, the Tata Digital India Fund has had a slightly higher Standard Deviation of 19.35 compared to the ICICI Pru Technology Fund’s 18.77. This implies that the Tata’s Fund has experienced more significant fluctuations in its returns, indicating higher volatility. However, the difference between the two funds’ standard deviations is not substantial, suggesting that both funds have a relatively similar level of volatility, with Tata Digital India Fund being slightly more volatile.
In terms of risk-adjusted returns, the Tata Digital India Fund, with a Sharpe Ratio of 0.16, outperforms the ICICI Pru Technology Fund, which has a Sharpe Ratio of 0.13. This suggests that, while both funds have generated returns for the risk taken, the Tata Digital India Fund has slightly outperformed the ICICI Pru Technology Fund.
A higher Sortino Ratio indicates that a fund has higher risk-adjusted returns without taking on as much downside risk. The Tata Digital India Fund has a Sortino Ratio higher than the ICICI Pru Technology Fund’s. This indicates that the Tata Digital India Fund has provided better downside risk-adjusted returns, meaning it has managed to protect against downside risks more effectively than the ICICI Pru Technology Fund. This could be a critical factor for investors who prioritise minimising potential losses during market downturns.
Remember, this comparison is just to give you an idea of the risk profile of the two best mutual funds in the IT sector. Consider your risk tolerance and investment goals to determine which fund aligns better with your investment strategy.
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Top Holdings of the Schemes:
The ICICI Pru Technology Fund and the Tata Digital India Fund both show a strong emphasis on leading companies in the Indian technology sector. However, their approaches to sector allocation and top holdings reveal distinct strategies for capturing the IT sector’s growth potential.
ICICI Pru Technology Fund Tata Digital India Fund Company % Assets Company % Assets Infosys Ltd. 24.73 Infosys Ltd. 21.76 Tata Consultancy Services Ltd. 12.10 Tata Consultancy Services Ltd. 11.31 Bharti Airtel Ltd. 8.04 Tech Mahindra Ltd. 9.76 HCL Technologies Ltd. 5.44 HCL Technologies Ltd. 7.20 Tech Mahindra Ltd. 5.09 LTIMindtree Ltd. 5.91 LTIMindtree Ltd. 4.83 Zomato Ltd. 5.86 Persistent Systems Ltd. 2.51 Wipro Ltd. 4.62 Wipro Ltd. 2.43 Persistent Systems Ltd. 3.18 Zomato Ltd. 2.37 Mphasis Ltd. 2.71 Mphasis Ltd. 2.02 Cyient Ltd. 2.52 Data as of July 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)Infosys Ltd. emerges as the largest holding for both funds, occupying 24.73% of the assets in the ICICI Pru Technology Fund and 21.76% in the Tata Digital India Fund. This significant allocation reflects the dominant position of Infosys in the technology sector and its consistent performance. Both funds also have substantial investments in Tata Consultancy Services Ltd. (TCS), with the ICICI Pru Technology Fund allocating 12.10% and the Tata Digital India Fund allocating 11.31% of their assets to TCS. This similarity in top holdings suggests a common belief in the strength and growth prospects of these tech giants.
The ICICI Pru Technology Fund’s allocation to companies like Bharti Airtel suggests a strategy that includes companies supporting the technology infrastructure, not just pure-play IT services. In contrast, the Tata Digital India Fund leans more towards pure technology plays and newer digital businesses, reflecting a more focused approach on software, IT services, and internet-driven companies.
This suggests that both funds are heavily invested in India’s leading IT companies, indicating confidence in its growth potential.
While the ICICI Pru Technology Fund focuses on Indian technology companies, it also allocates a strategic allocation to global tech giants to provide diversification and capitalise on global technological advancements. In contrast, the Tata Digital India Fund, while also holding shares in Wipro Ltd. (4.62%) and Persistent Systems Ltd. (3.18%), places a greater emphasis on newer digital entrants like Zomato Ltd. (5.86%) and Cyient Ltd. (2.52%). This inclusion of a digital consumer platform like Zomato signifies a tilt towards digital-centric companies that are pivotal in the new-age economy.
This subtle difference in sector focus within the IT segment could influence the funds’ performance based on how those specific stocks perform.
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Expense Ratio of the Schemes
When comparing thematic funds, the Expense Ratio, which represents the annual fee charged, plays a crucial role in determining your returns. Here’s a quick breakdown of ICICI Pru Technology Fund vs Tata Digital India Fund:
Scheme Name Direct Plan Expense Ratio Regular Plan Expense Ratio ICICI Pru Technology Fund 0.91% 1.74% Tata Digital India Fund 0.36% 1.67% Data as of July 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)As you can see, the ICICI Pru Technology Fund has a significantly higher expense ratio for both plans as compared to the Tata Digital India Fund. Do note even a small percentage point difference in expense ratio may accumulate over time and impact your returns.
Tata Digital India Fund’s lower expense ratios under the direct and regular plan could be considered a cost-effective option for many investors. However, do remember, that a lower expense ratio translates to potentially higher returns over time, but a lower expense ratio should not be the only factor to be considered while investing in sectoral funds.
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Suitability of Investors to the Schemes:
ICICI Pru Technology Fund is looking to capitalise on the rapid growth in digital transformation, IT services, and technological innovation. Given its sectoral focus, this fund is best suited for aggressive investors with a high-risk tolerance who are seeking to diversify their portfolios with a specific bet on the technology sector. Investors must be prepared for significant volatility due to the cyclical nature of the technology industry.
The ICICI Pru Technology Fund is ideal for those with a long-term investment horizon of at least 5 to 7 years, as this timeframe allows the investment to weather short-term market fluctuations and benefit from the potential high growth of the technology sector.
[Read: Thematic Funds Become Market Leaders with Record-High AUM Growth]
Tata Digital India Fund is a more concentrated thematic fund that specifically targets the digital and IT sectors within India. This fund is appropriate for investors who are confident in the long-term growth prospects of the Indian digital economy. It focuses on companies that are directly involved in the digital transformation wave sweeping across India, such as software development, IT-enabled services, and digital platforms.
The Tata Digital India Fund is ideal for investors who want focused exposure to the Indian digital landscape and have a higher risk appetite, as the fund’s performance can be highly correlated with the cyclical nature and regulatory changes in the Indian tech sector. Given the targeted nature of its investments, the fund may experience higher volatility, but it offers the potential for significant returns over the long term.
Both funds offer a way to gain exposure to the growing technology sector but with different scopes and geographic focuses. However, note that these funds focus on carrying a concentrated portfolio related to a specific sector. Ensure they complement your existing portfolio allocation to spread risk.
The Future of IT: Trends and Innovations Reshaping the Sector
As the sector continues to evolve, several key trends are shaping its future outlook and redefining its trajectory. These advancements promise to propel the Indian IT industry to new heights, leveraging technological innovations to meet the evolving demands of the global market.
The rise of Artificial Intelligence (AI) and Machine Learning (ML) is revolutionising various sectors, with the Indian IT industry leading this transformation. As demand for automation, predictive analytics, and data-driven decision-making grows, Indian IT companies are investing heavily in AI and ML technologies. Additionally, cloud computing is crucial to the sector’s expansion, driven by the need for scalability, flexibility, and cost-efficiency. Indian IT firms are enhancing their cloud offerings, including Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS).
Spending in the Indian IT sector is projected to reach USD 138.9 billion in 2024, up from USD 122.6 billion last year, reflecting a double-digit growth rate of 13.2%. Accenture’s latest research forecasts that AI will boost India’s annual growth rate by 1.3% by 2035. India’s National Artificial Intelligence Strategy, prepared by NITI Aayog, outlines a roadmap to leverage AI’s potential across various fields, positioning India at the forefront of this technological evolution.
The fintech revolution is reshaping financial services, with Indian IT companies driving this transformation. As demand grows for digital payments, blockchain technology, and financial analytics, Indian IT firms are creating innovative solutions like digital wallets and blockchain applications. This trend is set to significantly boost the fintech sector, with Indian IT companies playing a key role in advancing financial services.
Looking ahead, the Indian IT sector’s strategic focus on innovation and technology will likely continue to foster its growth and global leadership.
To conclude…
The Indian IT industry remains a powerhouse of innovation and growth, continuously adapting to new trends and challenges. Its contributions to technology and financial services not only bolster its own growth but also enhance India’s standing on the global stage, reinforcing its role as a leader in the evolving tech landscape.
Both the ICICI Prudential Technology Fund and the Tata Digital India Fund offer compelling investment opportunities within the IT sector, each with its distinct strengths and strategies. Ultimately, the choice between these funds should align with your investment goals and risk tolerance.
Disclaimer: PersonalFN does not receive any monetary compensation from the fund house or scheme names stated in the article.
This article first appeared on PersonalFN here
