The massive rally in the IT sector in 2021 stretched valuations and a correction was much needed, analysts said. Big IT companies like Infosys, Tech Mahindra and L&T have seen their stock prices fall by more than 10% in the past two months.

“The sector is going through a correction as valuations were well above its long-term average. The recent earnings season also saw some disappointments both on growth and margins. Cost pressures for the coming quarters should be high, as expenses such as travel, installation fees and visa fees begin to normalize From a demand perspective, management remains optimistic, which is also evident in the revenue outlook and shared guidance Global IT spending is expected to remain elevated over the next few years according to market research organizations, which adds visibility to Indian IT services companies in a two- to three-year outlook,” says Meeta Shetty, Principal Analyst and fund manager, Tata Mutual Fund.

Shetty also thinks the information technology sector has generated much better returns over the past two years, thanks to both a revaluation in valuation and higher-than-expected growth. She says that going forward, the sector should only focus on growth.

Mutual fund advisors also believe that the current volatility is short-term and that the longer-term outlook for IT funds looks promising. “Tech stocks reacted to lower-than-expected results from Infosys as well as the general correction of global tech companies. And while there has been a healthy correction over the past month, 1-year returns are still at 26%. Even the 3-year return aggregates to almost 29%. If you have a risk appetite, now is a good time to add funds to this sector. If you are an existing investor, you need to stay invested and not be bothered by short-term volatility,” says Juzer Gabajiwala, Head of Mutual Funds, Ventura Securities, a Mumbai-based financial services firm.