Technology-focused mutual funds have emerged as one of the worst performers across multiple periods. Continuous underperformance has triggered questions among investors about whether they should add more to existing holdings or stay invested with their current exposure.
Market experts say that investors should avoid emotional decisions and if allocation in these funds is limited then one should continue to stay invested and for fresh investments, diversified fund categories are a better choice.
Rajesh Minocha, a Certified Financial Planner (CFP) and Founder of Financial Radiance, shared with ETMutualFunds that tech funds have underperformed amid concerns about a global economic slowdown, reduced discretionary technology spending, margin pressures, and heavy reliance on US demand and markets responded sharply to earnings declines after years of high valuations. Investors should avoid emotional decisions.
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Minocha further said that successful sector fund investing requires precise timing, so if your allocation is limited, it is advisable to stay invested and for new investments, consider diversified options such as flexicap, largecap, midcap, or multicap funds.Another expert, Manish Srivastava, Executive Director, Anand Rathi Wealth told ETMutualFunds that this consistent underperformance is due to slower global technology spending, as many companies are delaying new IT projects and budgets, AI and automation are also disrupting the industry and changing the traditional IT services model and this hence reduces demand for routine work and creating uncertainty about future growth
Srivastava also said that many companies are also facing pressure on margins because of pricing challenges and higher spending on new technology, the recent fall in IT stocks further dragged down performance and given this volatility, investing in sectorial/thematic funds is not recommended as it requires tactic entry & exit to ride the performance which is not suitable for regular investors.
An analysis by ETMutualFunds showed that these funds fell by 10.42% in one month, by 13.18% in three months, and -10.57% in 6 months, and are still down -8.75% over 1 year. In the current calendar year so far, these funds are down by 13.05%. The returns delivered in the last three years are also the lowest among all equity mutual fund categories.
In comparison to this, diversified categories such as small cap, mid cap, flexi cap, large cap have performed better and many other sectoral and thematic funds have delivered better returns in the said time periods.
When does this underperformance become a red flag rather than a buying opportunity?
Srivastava said that investors should first understand their profile before investing in sector funds. For traders, these funds may suit tactical entry and exit. However, for long term investors, such categories can be challenging because strong cycles make timing difficult and may lead to opportunity loss if money remains stuck during weak phases.
Post sharing the yearly scorecard of tech based funds, Srivastava further said that such sharp swings mean investors can face back to back negative years after periods of strong performance and for most investors, diversified funds are more suitable as they spread exposure across sectors, reduce dependence on one theme, and help cushion the impact of a slowdown in any single sector, leading to more consistent long term returns.
Minocha said underperformance is a red flag when it signals structural decline, such as technological disruption, sustained margin compression, or loss of global competitiveness, if companies maintain strong balance sheets and stable earnings forecasts, short-term corrections are less concerning so investors should reassess their holdings if the company’s fundamental business model weakens.
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According to a report by ETMarkets, a sharp correction in IT stocks has raised some worries over the broader dip in returns if this continues for long. According to an Aequitas report, IT accounts for over 10% of holdings in top mutual funds.
The Nifty IT index has fallen nearly 17% in a month. Some key stocks such as TCS and Wipro are down over 30% from recent highs. Infosys, LTIMindtree, HCL Tech and Tech Mahindra have also seen double-digit declines. In some cases, stocks have lost as much as one-fifth of their value in a single month.
The selloff has been driven by anxiety around artificial intelligence and whether it threatens the basic economics of India’s $250 billion technology services industry. Generative AI tools are now capable of writing code, testing software and even maintaining systems. Investors who once viewed Indian IT as a steady compounder are now worried that automation could shrink billable work and pressure margins.
How vulnerable are SIP investors to prolonged low returns?
Minocha said that SIP investors in tech-focused funds may experience extended periods of low returns if the sector remains weak and diversification helps mitigate this risk.
Since IT represents over 10% of mutual fund holdings, it is unlikely to significantly drag down long-term portfolio returns if investments are spread across multiple sectors and the main risk arises from concentrated exposure to a single sector, so avoid sector-specific market timing, he further said.
Citing same impact on returns for SIP investors, Srivastava said that rupee cost averaging plays a huge role in SIPs, but if the sector remains weak for 2 or more years, this lag will be seen in the portfolio returns and IT already forms around 8 to 10% of indices and over 10% of most diversified equity funds, so doing an SIP in tech funds will lead to overlap and increase portfolio risk.
The yearly performance of these funds showed that in 2020 these funds gave an average return of 56.71% and 64.20% in 2021, followed by a negative average return of 21.18% in 2022. In 2023, these funds recovered and gave an average return of 34.21% and 26.76% in 2024.
These funds again witnessed a decline in their performance and gave a negative average return of 4.70% in 2025.
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Seeing this mixed trend in the performance of tech based mutual funds, what is the outlook for these funds and what are the key risks facing them? Srivastava said that looking ahead, the technology sector may remain volatile in the near term due to the evolving industry and there are a lot of elements such as lower global client spending, pressure on margins from automation, and disruption from AI which are likely to keep growth low, companies are also investing heavily in new technology and employee retraining, which may impact profitability for some time.
“As the sector shifts from a labour driven model to an AI led model, performance may stay uneven until clear improvement in growth and margins becomes visible and at the same time, many new players are entering the space, reshaping the industry”
“First mover advantage alone is no longer enough. Companies that continue to innovate and adapt may sustain growth, while others that fail to evolve may struggle, showing that gaining early leadership is easier than maintaining it over time and investors should avoid investing in a single sector and should rather focus on broad based diversified equity categories,” Srivastava further said.
While mentioning slower global economic growth, a decline in US technology expenditures, fluctuations in currency exchange rates, disruptions to operational costs from artificial intelligence, and increasing margin pressure as some of the dangers for the sector, Minocha said that the current situation indicates a cyclical risk for tech funds over the next 12 to 24 months, current trends suggest a cyclical downturn rather than a permanent decline, with recovery dependent on global demand and investors are advised to prioritise diversified equity funds over sector-specific investments and to remain patient, as timing sector movements is challenging.
Technology funds are sectoral funds which invest most of their corpus in a particular sector, and the performance of the schemes is based on the performance of the sector. That is why thematic or sector funds are recommended only to investors with thorough knowledge about the sector. You should invest in these schemes only if you have a long investment horizon or have intimate knowledge about the sector to time the entry and exit in these schemes.
One should always consider risk appetite, investment horizon, and goals before making any investment decisions.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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