Nippon Life India Asset Management Limited (NAM India) announced the launch of the Nippon India Innovation Fund, an open-ended equity fund scheme that would predominantly invest in a diversified portfolio of companies driving innovation across themes like fintech, speciality chemicals & pharma, auto & auto ancillaries, internet-based businesses, MNCs, etc.
Investors inclined to participate in this new fund offer from August 09, 2023 to August 23, 2023 may feel interested as the fund would invest at least 80 per cent of its assets in innovative companies that have the potential to disrupt their industries and create significant value for investors in the long term.
Innovation is the new “buzzword”
As per the Scheme Information Document, the fund house would not limit itself to putting its money in one particular market sector or cap but would be investing in a multitude of companies across various market caps and sectors. This underlines the fund’s flexibility to enter and exit investment opportunities after identifying companies ahead of the curve in innovations, technologies, or business models.
As opposed to many funds that invest in specific indices or sectors or segments, this fund will follow an innovation theme.
Speaking at the launch, Sailesh Raj Bhan, CIO – Equity Investments, Nippon India Mutual Fund said, “Over the next 20 years India is likely to witness significant investment in Innovation and R&D (Research & Development). The need for creating differentiation through innovation is a key growth driver for the long-term success of any business. Participating in this space is critical as Innovation led transformation and transition may offer growth possibilities across multiple segments. Hence, we are launching Nippon India Innovation Fund to capture some of these potential opportunities. However, we also need to understand that such themes may have higher gestation periods as not all innovation will be successful and attempt to manage the risks through adequate diversification across sectors.”
Investors looking for new opportunities to invest in this current phase marked by optimism and growth may find this fund well-positioned to capture companies that have the potential for significant growth.
Assessing the risk involved
This is not the first fund house to dabble in the innovation theme. Before this, ICICI Prudential Mutual Fund had launched the ICICI Prudential Innovation Fund on April 10, 2023.
While it seems at the outset that this fund would be investing in companies utilizing new technologies and processes, the “innovation” theme continues to be the most concerning and debatable factor. This is because companies can benefit from this theme only when it is short-term, or else its effect would not be palpable nor commensurate with expectations.
Also, innovation comes with a level of risk involved. Some risks can result in failures, thus, affecting the company’s profits and its reputation. Some thematic schemes may be highly risky, thus, augmenting the chances of suffering from capital loss.
Moreover, this is essentially a thematic fund, thus, making it prone to the sudden ups and downs of the market. There exists an aspect of unforeseeable market cycles that might persist for prolonged durations. The devaluation resulting from obsolescence or alterations in regulations, combined with the inflexible structure of the scheme, could result in a lasting reduction of capital. As a result, engaging in thematic fund investments could entail heightened potential for volatility and risk.
Considering how this fund’s features are not much distinct from that of a thematic fund, putting money in one such fund may entail heightened volatility and risk due to the following factors:
- Unpredictable market cycles: Thematic funds centre their focus on specific themes or sectors, rendering them more susceptible to fluctuations in the market. For instance, a thematic fund concentrating on renewable energy stocks might face substantial losses in the event of a decline in oil prices.
- Depreciation from obsolescence: Thematic funds are also vulnerable to losing value should the underlying theme or sector become outdated. To illustrate, a thematic fund invested in solar energy stocks could experience devaluation if a breakthrough in battery technology diminishes the competitiveness of solar energy.
- Regulatory changes: Alterations in regulations can significantly impact the value of thematic funds. Take, for example, a thematic fund heavily invested in cannabis stocks, which could experience devaluation due to new regulations restricting the sale or usage of cannabis.
- Structural rigidity: Thematic funds can possess a more inflexible structure compared to other fund types. This lack of adaptability may hinder their response to shifts in the market or alterations within the chosen theme. For instance, a thematic fund focusing on electric vehicle stocks might struggle to adjust to changes in electric vehicle technology or shifts in the electric vehicle market.
No way to check the performance
Past returns do not mirror future performance, though a sneak peek into a fund’s history can help evaluate its potential performance in the future. Since historical performance data is unavailable for these thematic mutual funds, we cannot determine whether this new fund will deliver a favourable performance in the future.
The introduction of fresh products or services does not guarantee immediate benefits for companies. This is due to the multitude of factors influencing the success of a new offering, such as demand levels, pricing, and competitive dynamics. Moreover, it takes time for a novel product or service to gain momentum in the market.
Consequently, investors cannot predict the performance of a thematic fund that targets companies unveiling new products or services over the medium to long term. The fund's performance is subject to various influences, including the achievements of the companies’ newly launched offerings, prevailing market conditions, and the proficiency of fund management.
But then a lot depends on how much risk you are willing to take. Investors with a high-risk appetite may find this innovation-theme-based mutual fund interesting though new-age investors or those averse to extreme market risks must strictly avoid putting their hard-earned savings in this fund.