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Information technology (IT) was the top sectoral bet for 2021 as funds based on this industry offered an average return of around 50% in 2021, according to Value Research, a mutual fund tracking firm.

For a long time, India’s IT sector has been a key driver of the country’s economy, and the segment got a further leg-up after the covid-19 pandemic broke out last March. In fact, IT funds have been the best performing on a three-, five-, and 10-year basis.

Moreover, the tech sector has continued to scale new heights, as its weightage increased to 13.5% (up 230 basis points on a yearly basis in the calendar year 2021) in overall equity funds. The sector ranked second and is at an all-time high in respect of sectoral allocation by mutual funds, showed a recent report by Motilal Oswal Financial Services Ltd (MOFSL).

Further, for the month of December, with regard to a value increase in terms of holding by mutual funds, five of the top 10 stocks were from technology: Infosys, TCS, HCL Technologies, Wipro, and Tech Mahindra.

IT mutual funds have achieved outstanding returns in recent years. But do they have the potential to continue to do so in the future?

Indian IT bellwether companies, TCS Ltd, Infosys Ltd and Wipro Ltd, recently came out with their earnings numbers for the third quarter of FY2022.

According to Nirmal Bang Institutional Equities Research, which has a positive stance on the sector, in a seasonally weak quarter, Infosys (to a greater extent) and TCS (to a lesser extent) delivered better-than-expected revenue growth.

“Wipro reported weaker-than-expected revenue growth, but within its guided band. Commentary of all three managements indicated continuing strong demand environment," it wrote.

Rushabh Desai, founder of Rupee With Rushabh Investment Services, who is also bullish on the tech sector, says due to covid-19, the way things have shifted to the digital, this sector is going to take a good pace in the future.

While experts are largely bullish on the IT sector, there are some concerns. For example, the tech sector is trading at a 70% premium to its 10-year average multiple. Meanwhile, Desai suggests taking exposure to a global technology sector instead of just focussing on India. “A FAANG plus or Nasdaq 100 based fund would be a good fit," he said.

For taking exposure to the Indian IT sector, his pick is a flexi-cap fund, where the fund manager has the flexibility to choose a company in the IT sector that might do really very well.

While information technology funds are expected to continue their fine form, investors should note that sectoral funds are risky. These funds can do very well in certain periods, but they can have downsides too.

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