The government’s robust focus on digitalisation and India’s growing might in the global information technology industry, is paving the way for the consistent expansion of the domestic IT sector. According to reports, the revenue from the IT services industry is expected to touch USD 22.41 billion by the end of the year and expand at a stellar 13.97% compounded annual growth rate, to reach USD 43.09 billion over the next five years. This surge in the IT industry’s growth has piqued the interest of investors looking for opportunities in this dynamic sector and one of the investment avenues gaining prominence is the IT Exchange Traded Fund (ETF).
What is an IT ETF?
In the simple terms, an ETF is an investment offering which tracks a particular underlying index. In this case, an IT ETF is a passive mutual fund that endeavours to replicates the Nifty IT index in terms of constituents and proportion of weights, with minimal deviation. Hence, the return an investor gets is similar to that of the index returns minus expenses. It provides investors with an opportunity to invest in a diversified portfolio of IT stocks, offering benefits such as liquidity, transparency, and cost-efficiency.
Why choose the IT industry?
India is now recognised as a global IT services hub, providing a wide range of software development, IT consulting, and outsourcing services to businesses worldwide. Several of the listed IT names have established a strong presence in key markets, including the United States and Europe, making them integral partners for global businesses seeking digital solutions. In addition to participating in the growth of these giants, you also stand to benefit from the ongoing digital transformation in the country, which is focused on emerging technologies such as artificial intelligence, blockchain, cloud computing, and cybersecurity.
Presently, merely 30% of global businesses have transitioned to the cloud. What’s even more noteworthy is that many of these early adopters are still in the initial phases of embracing cloud technology. Consequently, cloud migration and its widespread adoption are poised to remain pivotal drivers of growth in the coming years. Regarding cost competitiveness in customer delivery, Indian businesses maintain a strong global advantage. Consequently, it is very likely that these companies will further enhance their market presence in the global technology services market.
Why consider IT ETF?
When investing in stock market, due diligence is of at most importance. For a lay investor, one may not have the time or other resources to do the needful. At such times, by investing in an IT ETF, an investor gets exposure to a broad range of IT companies, thereby reducing the risk associated with investing in individual stocks. Also, the names which form a part of the index would have to clear some stringent filters to make it to the index, thereby ensuring weak companies stand weeded out in the process.
Another benefit of investing in an IT ETF is that the units of these are traded on the stock exchanges like individual stocks, ensuring high liquidity. This means you can buy and sell these units during market hours at market prices, thereby enhancing flexibility. Given that the ETF replicates an underlying index, an investor, before investing has a clear idea on the set of companies one will be investing into. This transparency helps an investor to make informed decisions. Finally, when it comes to cost associated with investment, ETFs emerge as a cost efficient option, given their low expense ratio. The expense ratio for IT ETF, can be as low as 0.2%. The caveat is that an investor needs to have a demat account to buy and sell ETF units.
For any forward-looking investor, allocating a portion of their funds to IT ETFs can be a strategic move. Moreover, the resilience and growth potential of the IT sector in India make it an attractive investment option. However, while at it do ensure that an IT ETF aligns with your personal investment profile, which includes your risk appetite, return requirements, time horizon and investment goals. It is imperative to consider this investment from a 5-year perspective.
The author is Head Investment Strategy, ICICI Prudential AMC. Views are personal.
