Should you invest in sectoral technology funds?

Under the equity category, sectoral technology funds have been at the forefront when it comes to their return in the last one year. The value research data shows that the technology funds have delivered a return of 82.15%, 30.59%, and 25.83% over one, three, and five years as of 30 July, 2021. Let’s take a look at to understand if the technology funds are suitable for you:

What are technology funds?

Typically, technology funds invest in shares of technology businesses. They usually make bets on developing technologies that can disrupt the industry with new developments. Some significant Indian technology funds are the ICICI Prudential technology Fund, SBI IT Funds, and Franklin India technology fund. (See the table: Technology Mutual Fund Returns).

Their portfolio includes technology firms such as Infosys, HCL Technologies, Tech Mahindra, and Mind Tree, amongst others. The majority of the companies in these funds are focused on resolving complicated business challenges through ground-breaking technological advances. IT, digital transformation, data analytics, artificial intelligence, and machine learning are a few examples.

“A new crop of digital-native, mobile-first companies is emerging and scaling up at warp speed, enabled by a world-class, frictionless payments ecosystem. In general, there can be large value creation opportunities in disruptive, technology-enabled, emerging business models, and these will become a larger part of the market over the next 5-10 years,” said Rohit Chordia, Director – Investments, White Oak Capital Management.

Taxation aspect

Similar to equity funds, short-term capital gains on investments in this fund are taxed at 15% if units are sold within one year of allotment. Long-term capital gains over Rs. 1 lakh within a year of allotment on the other hand, are taxed at 10% without indexation.

What is the risk involved?

Sectoral funds are among the riskiest types of mutual funds. Since these funds invest exclusively in one area, they lack sector diversity, which is a primary cause for their high risk.

If the sector falls, all of the portfolio’s equities will collapse, with nothing to buffer the loss. These funds are appropriate for only the most seasoned investors, and even then, no more than 10% of the portfolio should be invested in them.

Should you invest?

> In India, technology mutual funds have regularly delivered an annualised return of 15% to 21% over five years. With such a strong track record, these funds are expected to continue to offer strong returns in the future.
> The primary benefit of investing in technology mutual funds is that they provide investors with exposure to dozens of technology businesses through a single fund.
> Ideally, investors should invest in this fund to diversify their holdings. One should not rely only on this fund to generate wealth.
> Investors considering investing in technology funds should closely monitor the funds’ performance over the last three years. Also, one must have a thorough understanding of the technology sector and its potential market.
> As these funds mainly invest in equities, they can be volatile in the short term. However, the risk comes down substantially if investors hold it for a long time.