They have given good returns in the past but watch out for the concentration risk

 

Technology sector funds are currently on a roll: the category has given an average return of 14.31% to investors over the past year and 23.20% over the past three years.

"Business volumes have grown and companies have delivered good earnings growth, which has in turn got reflected in stock prices,"  ICICI Prudential Mutual Fund. Adds  DSP BlackRock Investment Managers: IT services export companies have been gaining market share against their global peers. The rupee's depreciation against the US dollar has also worked in the sector's favour.

According to industry body Nasscom, the Indian IT industry is expected to grow at 12-14% in 201516. The opportunities for the sector lie in new digital technologies such as cloud, social media and mobile."A lot of work could come to Indian IT players once corporates have finalised their strategies and drawn up their action plans. Application development and maintenance work, the bread and butter for most Indian IT companies, will play its role, though the segment's growth has slowed.

Spoiler alert

The IT sector is in a transition phase. The new digital technologies will lead to disruption of exist ing revenue streams. The US visa issue for Indian professionals is also a worry. Other near-term risks include cross-currency movements and weak er outlook of IT spending by energy, telecom and retail sectors.

What should you do?

Investors should be cautious of the concentration risk in these funds.Those who have invested in diversified-equity funds will already have adequate exposure to the IT sector via these funds. You should either invest in tech funds after consulting a financial planner or have good knowledge of the workings of the IT sector. Experts reckon that your exposure to tech funds should not exceed 5-8% of your total equity portfolio. Invest in a fund that has given sound riskadjusted returns over the long term and beaten its benchmark across market cycles. It is also important that the fund's portfolio and management be stable. Some tech funds have a broader mandate to invest in media, telecom and Internet services while others are focused on the IT sector alone. Understand the mandate of the fund before you decide to invest.