Weekly Musings – NFO Pick (Axis Nifty IT Index Fund)

3 Jul 2023 , 05:53 AM

As the name suggests, the Axis Nifty IT Index Fund will be benchmarked to the IT Index and will try to mirror the index returns with minimal tracking error. It will be predominantly a large cap theme since most of the IT companies with the highest weightage in the IT index are also index heavyweights. In the last few weeks, we have covered a mix of active and passive funds and this week we are focussing on a sectoral passive fund that is pegged to the underlying IT index. The fund has opened on June 27, 2023 and will try to mirror the TRI of the Nifty IT index.

Why the bet on IT sector at this point?

The IT sector has had a tough time in the last one year. First, there was attrition, then there was the challenge of falling operating margins and now there are concerns over tech spending weakening due to a global recession. Amidst this scenario, here is what is working for the IT sector in India.

• The demand for global IT services is expected to increase from an average of 4.4% between 2015 and to a level of 7.6% CAGR in the period 2021 to 2024. Even the number of annual contracts to be issued / renewed during this period has nearly doubled.

   

• The undertone of the IT sector is shifting from the traditional BFSI to SMAC (social, mobility, analytics, and cloud). Indian IT leaders have been in sync with this change. For example, both TCS and Infosys derive anywhere between 50% and 60% of their revenues from their new age digital offerings. Indian It companies rank in the top-10 on most of the execution and innovation parameters in the IT sector.

   

• Indian IT sector continues to outperform the global IT sector consistently. In FY17, Indian IT exports grew 7.7% in CC (constant currency) terms while global IT peers grew just 3.2%. In FY22, Indian IT exports grew 16.5% CC while global IT players grew 12.8%. The healthy lead has been maintained even while growing the customer wallet share base. The latest focus on IT companies is based on revenue rebound from FY25 onwards.

   

• In terms of market share, Indian IT companies have seen their market share globally improve from 5% in FY05 to 27% in FY23. In fact, the market share has been above 20% since the year FY2015. Also, the IT spending is expected to rapidly accelerate from the coming quarters onwards, bring Indian IT companies back into the limelight.

What is the investment case for the Nifty IT index

To understand why the Nifty IT index is special, one needs to look back quickly at what it represents in terms of value. Here is a quick rundown.

• Let us first look at three of the biggest corrections in recent times viz. the global financial crisis of 2008, taper tantrum of 2013 and the COVID pandemic of 2020. During these periods, the returns from the low points was substantially higher for the IT index over the next 1 year after the fall. Post the GFC, the Nifty bounced 74% from the lows while the Nifty IT index bounced 153% from the lows. Post 2013 lows, Nifty bounced 18% from the lows while the Nifty IT index bounced 57% from the lows. Post the COVID pandemic, the Nifty gained 17% in one year while the Nifty IT index gained 52% in the same period. Clearly, the IT index has shown a lot more resilience than the market.

   

• Let us talk about long term wealth creation. The Nifty IT index outperformed the Nifty in 9 out of the last 19 years. More importantly, the outperformance in each of these years has been substantial. If you compare the NSE sectoral indices in terms of CAGR returns over the last 10 years, the Nifty IT index has generated the highest compounded return of 18.5%, with the next best being financial services at just 15.1% CAGR.

   

• Since this is a mutual fund NFO, let us look at how an IT index SIP would have performed over different time periods. Had you done a SIP on the Nifty IT index on the first day of each month, the CAGR SIP returns would have been 17.01% over last 5 years, 18.82% over last 7 years and 16.68% over the last 10 years. In all these periods, it has comfortably beaten the Nifty 50 and the Nifty 500 by an average margin of 250 to 300 basis points.

   

• What about valuations and how does the Nifty IT index P/E ratio compare with the Nifty 50 index? The valuation premium of IT P/E ratio had gone way above (Average + 1SD) between 2021 and 2022, but after the latest correction the premium has reverted back to the average. Hence the valuation risk has come down substantially. 

   

• To sum it up, what is the story in favour of the IT sector? There are several stories. Macro headwinds are slowing and that means tech spending should pick up in the coming quarters. IT order books have held up despite a general slowdown, so the recovery should be rapid. Indian IT has traditionally gained from spending optimization and that should hold the sector in good stead this time also. Most of the top IT companies in India are at a deep discount to the average valuations of the last 3-5 years, so any recovery from these levels should be absolutely favourable to Indian IT sector. 

 

Who should opt for the Axis Nifty IT Index Fund

This fund would be a perfect fit for investors with a slightly higher risk appetite and who are willing to make a strategic bet on the Indian IT sector.

• The Nifty IT index comprises the blues of blue chips in Indian IT with an established track record of growth and profitability. It is also a much better option that trying to bet on individual IT companies as it gives a participation in the sectoral recovery per se.

   

• Interestingly, the Indian IT space is fairly attractive in terms of dividend yield. The average dividend yield on the Nifty IT index is around 2.07%, which is higher than the Nifty dividend yield, which is closer to 1.5%. Also, its correlation to the Nifty is just about 0.66, which means the IT index fund can also provide a hedge against the traditional cyclicals in your portfolio.

   

• Obviously, this is a passive sectoral fund, so the sectoral risk is high. Hence, investors must ideally take an investment time frame of at least 5 years to realize the full benefits of IT sector growth in this period. In terms of the risk-o-meter, it would rank as a high risk proposition, although the passive approach de-risks the micro factors substantially.

Glance at the Axis Nifty IT Index Fund NFO

Here are some details of the Axis Nifty IT Index Fund NFO you must know to decide on investing in the fund.

1. The fund opened for subscription on June 27, 2023 and the NFO subscription will close on July 11, 2023. It is an open ended fund that will track the IT Index TRI. Therefore, it is an open ended index fund and not a closed ended ETF, with continuous purchase and redemption available at NAV linked prices.

    

2. Entry loads do not exist in India, but if the fund is redeemed or switched within 7 days from the date of allotment, it will attract an exit load of 0.25%. There will be no exit load after that.

    

3. The minimum investment in the Axis Nifty IT Index Fund NFO would be Rs5,000 in the NFO and in multiples of Rs1 thereafter. 

    

4. The fund offers Regular and Direct plans for the investors. In addition, investors can either choose the Growth option or the IDCW (income distribution cum capital withdrawal) option.

    

5. How will the fund be benchmarked? It will be benchmarked Nifty IT Index TRI (total returns index). Hitesh Das will be the fund manager to the scheme.

The Axis Nifty IT Index Fund NFO is an opportunity for long term investors to benefit from a very specific bounce in the IT sector. The IT sector accounts for annual exports of $197 billion and hence is of national importance, especially considering that the IT services exports have played a key role in reducing the current account deficit of the Indian economy. IT sector has rarely disappointed investors and has bounced back much stronger after each fall. This fund is a bet on the inherent resilience of the Indian IT sector.