Best IT ETFs in India: Nifty IT ETFs

What are Nifty IT ETFs?

An IT ETF is a passively managed exchange-traded fund that follows an information technology sector index. The fund buys the index constituents in broadly similar proportions and adjusts the portfolio when the index changes. Units trade on the stock exchange throughout market hours, while the fund’s net asset value reflects the value of its underlying holdings after expenses. IT ETFs’ returns therefore depend heavily on global technology spending, client budgets, currency movements, employee costs, deal wins and valuations within the IT sector.

What Is the Nifty IT Index?

The Nifty IT Index is a sectoral index managed by NSE Indices Limited. It tracks the performance of major listed Indian companies that earn revenue from software services, IT consulting, digital solutions, engineering services and related technology activities.

• Index Composition: The index contains 10 companies from the information technology sector. Because the basket is small, the largest constituents can account for a substantial share of index performance.
• Weighting Method: The index uses free-float market capitalisation. Companies with a larger publicly traded market value receive a higher weight, subject to the index methodology and concentration limits.
• Major Constituents: The basket includes Tata Consultancy Services, Infosys, HCL Technologies, Wipro, Tech Mahindra, LTIMindtree, Persistent Systems, Mphasis, Coforge and Oracle Financial Services Software.

Overview of the Best Nifty IT ETFs in India

• Axis NIFTY IT ETF: Axis NIFTY IT ETF is a passive exchange-traded fund that aims to track the Nifty IT Index. It provides exposure to major listed Indian technology companies through a single ETF.
• Aditya Birla Sun Life Nifty IT ETF: Aditya Birla Sun Life Nifty IT ETF tracks the Nifty IT Index and offers diversified exposure to companies operating across IT services, software and related technology businesses.
• Kotak Nifty IT ETF: Kotak Nifty IT ETF is a passively managed fund designed to replicate the performance of the Nifty IT Index ETF. It allows investors to access a basket of leading Indian IT companies through an exchange-traded instrument.
• HDFC Nifty IT ETF: HDFC Nifty IT ETF tracks the Nifty IT Index and provides exposure to major technology companies listed in India. Its performance broadly follows the underlying index, subject to tracking differences and fund expenses.
• DSP Nifty IT ETF: DSP Nifty IT ETF is a passive ETF that aims to replicate the Nifty IT Index. It provides sector-focused exposure to listed Indian companies operating primarily in information technology and related services.

How to Invest in IT ETFs in India?

Investing in IT ETFs in India is straightforward:

1. Open a demat/trading/stockbroker account. You can open a demat account with smallcase!
2. Investors can use the Tickertape Stock Screener to analyse the list of IT ETFs and compare them to identify the best IT ETF in India based on various parameters such as underlying index, expense ratio, AUM, tracking difference and more
3. Place a buy order

Taxation of IT ETFs in India

IT ETFs that invest mainly in listed Indian shares generally qualify as equity-oriented funds for tax purposes.

• Short-Term Capital Gains: Gains from units sold within 12 months are treated as short-term capital gains and are generally taxed at 20%.
• Long-Term Capital Gains: Gains from units held for more than 12 months are treated as long-term capital gains. These gains are generally taxed at 12.5% above the applicable annual exemption limit.
• Dividend Taxation: Dividend income is added to the investor’s taxable income and taxed according to the applicable income-tax slab. A tax deduction at source may apply when the prescribed limit is exceeded.

Features of Nifty IT ETFs in India

• Sector-Specific Exposure: An IT ETF provides exposure to multiple listed technology companies through a single investment. This reduces the need to research and buy individual IT stocks separately.
• Intraday Trading: IT ETF units trade on the stock exchange during regular market hours. Investors can check the market price, trading volume, and bid-ask spread before placing an order.
• Passive Portfolio: The ETF follows a published index methodology instead of relying on active stock selection. Changes in the portfolio mainly take place during index rebalancing or corporate actions.
• Transparent Holdings: The index constituents and their weights are publicly available. ETF portfolios are also disclosed regularly, making it easier to track the underlying holdings.
• Low Minimum Investment: Investors can generally begin by purchasing one ETF unit, subject to its prevailing market price and the rules of the brokerage platform.

Advantages of Investing in Nifty IT ETFs

• Exposure to Global Technology Spending: Indian IT companies provide services across software development, cloud computing, data analytics, cybersecurity, engineering, and digital transformation. An IT ETF offers exposure to several companies linked to these areas.
• Diversification Within the Sector: An IT ETF spreads investment across companies with different clients, services, and geographic markets. This reduces dependence on the performance of a single company.
• Access to Large and Mid-Sized Companies: IT ETFs may include established large companies as well as mid-sized technology firms. This provides exposure to different business models and growth stages within the sector.
• Foreign-Currency Revenue Exposure: Many Indian IT companies earn a large share of their revenue in US dollars, euros, and pounds. Currency movements can affect the rupee value of this overseas revenue and influence reported earnings.
• Regular Index Review: The underlying index is reviewed periodically. Companies may be added or removed based on the index rules and eligibility criteria.
• Simple Portfolio Monitoring: An IT ETF allows investors to track one instrument instead of monitoring several individual technology stocks, financial results, and portfolio weights separately.

Risks of Investing in IT ETFs

• Sector Concentration Risk: An IT ETF invests only in technology companies. Weak demand, lower earnings growth, or falling sector valuations can affect several holdings at the same time.
• Global Demand Risk: Indian IT companies depend heavily on overseas clients. Lower technology spending, delayed projects, slower deal closures, or economic weakness in the US and Europe can affect revenue growth.
• Index Concentration Risk: Some IT indices hold a limited number of stocks and may have high exposure to a few large companies. Weak performance by these constituents can materially affect the ETF.
• Currency Risk: Many IT companies earn revenue in foreign currencies. A stronger rupee can reduce the value of overseas revenue when converted into rupees. Hedging and cross-currency movements may also affect margins.
• Employee-Cost Risk: IT companies depend on skilled employees. Wage increases, higher subcontracting costs, employee attrition, and lower utilisation can put pressure on operating margins.
• Technology Disruption Risk: Artificial intelligence, automation, and cloud platforms can change project pricing, staffing needs, and service demand. Companies may also need to invest heavily before new services begin contributing to revenue.

Factors to Consider Before Investing in IT ETFs

• Underlying Index: IT ETFs may track the Nifty IT Index or another technology benchmark. These indices can differ in the number of constituents, selection rules, stock weights, and exposure to large and mid-sized companies.
• Constituent Weights: Some IT indices are concentrated in a few large companies. As a result, the performance of the top two or three constituents can have a greater effect on ETF returns than the total number of stocks may suggest.
• Global Technology Spending: Indian IT companies depend on outsourcing demand, discretionary technology budgets, large deal pipelines, and project execution. Changes in global corporate spending can influence revenue growth across the sector.
• Existing Portfolio Exposure: Large IT companies are common holdings in diversified equity funds. An additional IT ETF can increase overall exposure to the sector, even when the ETF forms a relatively small part of the portfolio.
• Investment Horizon: The IT sector moves through cycles linked to global demand, earnings growth, currency movements, and market valuations. These cycles can lead to extended periods of strong performance or underperformance.