Technology fund has given returns of over 70% in one year: Should you invest?

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The technology sector in India has undergone many changes and is changing the shape of Indian businesses. One recent report by brokerage AnandRathi pointed out that the Indian IT sector is growing faster than Global IT. Further, this trend has also been observed in the Indian mutual fund industry.

For instance, as per the Value Research data, the technology sector-based fund has given a return of around 80% in the last one year as of November 7, 2021. Fund houses usually bet on companies that are going big on new innovative technologies. This includes artificial intelligence, digital transformation, data analytics, and so on.

What are technology funds?

Technology funds make an investment in the share of big technology companies. They mostly place 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. Their portfolio includes technology firms such as Infosys, HCL Technologies, Tech Mahindra, and MindTree, among others.

How are they taxed?

As they are sectoral equity-oriented 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.

Understand the risk

Sectoral funds are the riskiest type 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 one particular sector declines, all of the portfolio’s equities will crash, with nothing to cushion the loss. These funds are appropriate for only the most seasoned investors who have a high risk-taking appetite.

 Should you invest?

-Over the last five years, technology mutual funds in India have consistently delivered an annualised return of 30%, shows value research data. These funds are projected to continue to provide reasonable returns in the future, given their track record.

-The main advantage of investing in technology mutual funds is that they give investors access to hundreds of different technology companies all in one place. To diversify their holdings, investors might consider investing in this fund. However, this fund should not be relied on alone to build wealth.

-Investors contemplating technology funds should keep a close eye on the performance of the funds over the last three years. A deep understanding of the technology sector and its potential market is also required, given their highly volatile nature and risks.

-These funds might be volatile in the near term because they primarily invest in equities. However, if investors hold it for a long time, the danger is significantly reduced.