A look at the personal finance section of market news this month, and you will find quite a lot of mutual fund houses launching new tech fund offers in the information technology (IT) sector. This is not surprising as fund managers are bent upon benefiting from bottom fishing of quality stocks in the market. However, this brings us back to the question, “Is it worth investing in tech funds or funds that have their core focus on the technology theme?”
A look at some technology funds reveals that these funds have earned good returns to investors when held for a prolonged period. The “Cumulative” effect of “Compounding” is evident from regular and continued investments in them though the sector has been bled through sudden market fluctuations, steep market falls, and regular corrections in stock prices.
In recent years, the Indian technology sector has demonstrated remarkable performance, surpassing both the broader market and the technology-focused US markets. Several factors contribute to this phenomenon:
- The escalating adoption of digital technologies by businesses and consumers in India is propelling the demand for IT services.
- Renowned global IT giants like TCS, Infosys, and Wipro are headquartered in India, boasting a solid history of consistent growth and profitability.
- The Indian government's substantial investments in the IT sector are providing an additional impetus to this growth trajectory.
Collectively, these elements project a continuous expansion of the Indian technology sector in the forthcoming years. As a result, it presents an appealing investment prospect for those seeking long-term growth opportunities.
The following table illustrates the performance of some tech funds over five years and 10 years.
Name of the Fund | 5-year-returns (in %) | 10-year-returns (in %) |
ICICI Prudential Technology Fund | 20.70 | 20.97 |
SBI Technology Opportunities Fund | 20.41 | 19.03 |
Franklin India Technology Fund | 18.09 | 16.83 |
| Source: MoneyControl | ||
Most of these actively managed funds have very high exposure to tech stocks. With this sector bleeding red all along in 2022 and not performing up to investors’ expectations in 2023 to date, various mutual fund houses are now launching exclusive technology mutual funds that would buy stocks at cheaper valuations. Not that all information technology stocks are cheap and available at their correct value, however, fund managers are ready to wait for further 10-15 per cent corrections in this sector to invest at the correct prices, thus, benefiting from purchases at low prices and then redeeming the stocks at higher prices.
There is indeed limited diversification in these funds, thus, explaining the risk factor in these funds. Nevertheless, it's crucial to acknowledge the existence of certain risks linked with investing in the Indian technology sector. These potential risks encompass:
- The sector's cyclicality, which might lead to short-term volatility.
- Exposure to worldwide economic uncertainties, including a potential deceleration in the US economy.
Prospective investors should diligently evaluate these risks before making any investment decisions concerning the Indian technology sector.
However, the unbridled focus coupled with the waiting period during which investors continue to accumulate fund units at comparatively low prices helps them to gain from putting money in these funds in the long run.
Apart from regular systematic investment plans (SIPs) in these funds which involve investing through small and regular installments over a prolonged period, investors also buy chunks of fund units in a lump sum when the markets are terribly down and out. This helps them to gain the most when the tech cycle heats up in an upbeat market. However, to gain from these funds, investors must wait and watch. These funds perform in cycles, which means that there is no way investors can afford to fret and feel afraid of extreme market pitfalls due to unforeseen macro factors.
