Should you invest in Technology Mutual Funds?

Technology Mutual Funds are a type of scheme where fund managers invest in the stocks of information technology companies.

Padmaja Choudhury   /   January 11, 2022

Did you know there are different categories of mutual funds that investors can invest in? The sectoral fund is one such mutual fund category where fund managers invest in a specific sector of the economy, such as banking and financial services, healthcare, agriculture, or information technology. Lately, technology-based mutual funds have got a lot of traction amongst investors worldwide. But, before we get into the details of technology funds, let’s define technology funds.

Technology Mutual Funds are a type of scheme where fund managers invest in the stocks of information technology companies. The core objective of these funds is to offer its investors exposure to the technology sector. 

As the world is leading towards digital innovation, artificial intelligence & blockchain, there’s a growing demand for IT services across the world. In India, the IT sector has seen exponential growth in the last few decades. The IT industry accounts for 8% of India’s GDP (as of 2020). Indian IT firms have delivery centres across the globe. Considering the overall picture, the technology sector will likely grow in the coming years. By 2025, the Indian software product sector is anticipated to be worth $100 billion. Technology funds aim to benefit from the rise of IT companies.  

The importance of technology funds in the current scenario

·      Digitisation and technological transformations are rapidly encompassing all aspects of our lives. 

·      India is the top-ranking country delivering IT solutions across the world. There’s a rising demand for Indian IT professionals all over the world. 

·      The government of India is taking special actions to encourage the IT sector’s growth in the country.  

Advantages of technology funds

Opportunity to benefit from technological advancements: Since technology mutual funds primarily invest in leading or emerging companies in the technology sector, investors of these funds are likely to benefit when these companies expand and grow. 

Professional fund management: Professional fund managers who handpick stocks of companies related to the technology sector basis detailed research and analysis manage the technology mutual funds. The fund manager tracks the performance of these companies, keeps track of the news affecting the technology sector, studies the impact of domestic and global factors on the Indian technology firms, follows upcoming trends in the respective sector, which otherwise can be difficult for an individual investor. 

Cost-effective investment: Buying individual stocks of leading technology companies can sometimes be expensive. Mutual funds offer a way to invest a small amount periodically through a Systematic Investment Plan (SIP). One can invest Rs. 500 per month and include IT stocks in the investment portfolio through technology mutual funds.

Diversification within the specific sector: There are multiple companies in the technology sector. But one cannot invest in all of them. Buying stocks of even a handful of top IT companies can be a costly affair. For example, the price of one share of Infosys as of 01 January 2022 was Rs. 1,888. But starting a monthly SIP of Rs.1,000 in a technology fund that includes Infosys in its investment portfolio can help investors invest in Infosys and get exposure to some other top-ranking technology companies in India. This way, an investor can get a diversified portfolio of India’s leading technology companies through a single place. 

Top technology funds

Fund Name5 Year Return (Annualized)
ICICI Prudential Technology Fund35.64%
Tata Digital India Fund36.73%
Aditya Birla Sun Life Digital India Fund34.78%
SBI Technology Opportunities Fund30.75%
Franklin India Technology Fund27.11%

Disadvantages of technology funds

Concentration risk:  The flip side of sectoral funds is that a downturn of the respective sector can turn into heavy losses. Meaning, if the overall technology sector is going through an adverse phase, the entire investment exposed to the industry is likely to incur a loss. However, investors can mitigate the impact of such a risk by diversifying the portfolio and investing in a diversified fund that invests across other sectors or themes. 

Conclusion:

Since India is one powerhouse of the global IT industry, investing in tech companies of our country can prove beneficial in the long run. So, investors who want to take part in the growth journey of the information technology sector and earn reasonable returns with high risk might look at sectoral funds. 

However, as it is a sectoral fund, investors should not invest more than 10% of their equity portfolio in technology funds. 

New investors who have recently invested in mutual funds can stay away from the sectoral funds and focus on building a diversified portfolio to achieve their financial goals.  

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