Mutual funds are loading up on information technology (IT) stocks on improved valuations and low downside risk after a double-digit correction in top companies like Infosys and Wipro.
IT stocks were MFs' top sectoral buys in April when they invested a net of Rs 2,100 crore.
In the first four months of 2023, the net investments in IT amounted to Rs 9,500 crore, shows an analysis by ICICI Securities.
Infosys, which has had the steepest correction among large-cap IT stocks (down 19 per cent in the last six months), was MFs' top stock pick in March and April.
MFs added 30.4 million Infosys stocks in their portfolios during the period.
Analysts said that while the IT sector may see pain in another couple of quarters, stocks are attractive as the downside risk is limited and most negatives are already priced in.
"We are positive on the sector and have been urging clients to buy. The sector has under-performed the index for the last 18 months and we believe that the bottom has been made.
"Valuations are close to the pre-pandemic level, at least for Infosys.
"Others are available at a 5-10 per cent premium but that's justified due to a strong demand environment," said Vibhor Singhal, director, Nuvama Institutional Equities.
"Valuations are now reasonable.
"While the benchmark indices have gone back to the all-time high levels, IT stocks are trading significantly lower than their post-pandemic highs.
"Given that these companies have a proven long-term track record and great management, the fund managers' seem to be doing the right thing," said Rahul Jain, senior vice-president-research, International Money Matters.
Apart from the attractive valuations, experts say that the inflows of MF money into IT stocks is due to rebalancing of MF portfolios to bring IT sectors' weight closer to the index level.
The difference in IT sector's weight in MFs and BSE 200 has come down from 2 per cent to 1.6 per cent in the last two months.
However, the deep correction in some of IT stocks in recent months has meant that the IT sector's weight in MFs was down to a 34-month low of 9.3 per cent in April, said a report by Motilal Oswal Financial Services.