Why should you buy ETFs instead of stocks? Nithin Kamath of Zerodha explains

Diversification has long been regarded as one of the cornerstones of successful investing, helping investors reduce the risks associated with concentrated bets on individual stocks or sectors. Weighing into the debate, Zerodha co-founder and CEO Nithin Kamath said most investors are better off owning a broad basket of stocks or exchange-traded funds (ETFs) rather than building concentrated portfolios. He used the recent performance of the IT sector to make his case.

In a post on X, Kamath pointed to the recent performance of the IT sector to explain why diversified investing often works better over the long term. He noted that while the Nifty IT index has fallen around 8% over the last five years, Tata Consultancy Services (TCS) has declined by about 40%, highlighting the risks of relying on individual stocks instead of broader market exposure.

"For most people, buying a broad basket of stocks or ETFs is a better investment strategy than picking specific sectors and building concentrated stock portfolios. For example, over the last 5 years, the Nifty IT index fell by 8%, while TCS dropped by about 40%. By the way, we are working on a new Kite Nudge that will alert you when you are placing an order, if your exposure to a single sector exceeds X%."

Furthermore, Kamath revealed that Zerodha is developing a new Kite Nudge that will notify users when they place an order if their exposure to a single sector crosses a pre-defined threshold. The feature is aimed at helping investors avoid excessive concentration in one sector and encouraging better portfolio diversification.

Kamath's remarks come at a time when IT stocks have staged a sharp rebound after witnessing sustained selling pressure over the past few sessions.

IT stocks rebound after four-day slide

The Nifty IT index surged over 4% on July 2, snapping a four-session losing streak as investors returned to large-cap technology stocks despite mixed signals from global markets.

The rally was led by frontline IT companies. Infosys climbed 5.1%, HCLTech gained 4%, and Tata Consultancy Services advanced 3.2%, making them the top three gainers on the Nifty. Tech Mahindra rose 2.6%, while Wipro added 2.3%, resulting in five IT stocks featuring among the top 10 gainers on the benchmark index.

Buying interest was also visible in the broader market. Tata Technologies jumped 5%, Coforge gained 4.6%, while Mphasis and Persistent Systems rose 3-4% each, with four IT companies figuring among the top gainers on the BSE Midcap index.

The rebound followed a prolonged correction in the sector, with investors taking advantage of lower valuations after recent declines. IT stocks had come under pressure amid concerns over slowing discretionary technology spending, persistent macroeconomic uncertainty and the long-term impact of artificial intelligence on traditional IT services business models.

The recovery in domestic IT shares came despite weakness in global technology stocks. US equities ended marginally lower overnight, with technology shares under pressure as the Philadelphia Semiconductor Index slumped 6.3% on concerns over elevated valuations and heavy AI-related capital expenditure. Although an 8.8% rally in Meta Platforms helped limit losses on Wall Street, semiconductor stocks remained under pressure.

Asian technology stocks also traded lower, with South Korean chipmakers SK Hynix and Samsung Electronics declining sharply as investors rotated out of semiconductor stocks following a strong quarterly rally.

Despite Wednesday's rebound, the Nifty IT index remains the worst-performing sectoral index, having declined 30.6% as concerns over AI-led disruption weighed on investor sentiment. While worries over artificial intelligence, slowing discretionary spending and global macroeconomic uncertainty continue to dominate the sector, historical data suggests that periods of peak pessimism have often created attractive long-term investment opportunities.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.