Technology mutual funds: Meaning, benefits and how to invest?

With industries across the world embracing digital transformation, technology has become the backbone of global economies. Among the most popular investment vehicles that allow individuals to capitalise on this growth potential are thematic or sectoral technology funds. These sectoral funds are specifically designed to invest in companies that are part of the technology sector, enabling investors to gain exposure to a diversified portfolio of tech stocks.

In India, technology mutual funds can be a suitable investment option for those looking to tap into the ongoing digital revolution to create wealth.

Table of contents

• What is a sectoral technology fund?
• Are sectoral technology funds, technology mutual funds, and IT funds the same?
• Four advantages of investing in sectoral technology funds
• Who should consider investing in IT funds?
• The future of technology funds
• Why technology mutual funds are booming
• Factors to consider before investing in technology mutual funds
• How to invest in IT funds?

What is a sectoral technology fund?

A sectoral fund is a type of mutual fund that invests chiefly in companies belonging to a specific sector. For instance, a sectoral technology fund primarily focuses on companies that operate within the technology space. This can include companies involved in software development, hardware manufacturing, IT services, artificial intelligence, cloud computing, e-commerce, and other tech-driven sectors.

Are sectoral technology funds, technology mutual funds, and IT funds the same?

Some investors may ask, “What are technology funds?” and may wonder if the term can be used interchangeably with sectoral technology funds, technology mutual funds or IT funds. Such funds can be slightly different because of the differences in their investment universe.

Sectoral technology funds focus on technology as a single sector. Technology mutual funds could be sectoral or thematic. In the case of the latter, they may include a variety of sectors related to the technology industry and may follow technology as a broad theme. IT funds would typically specifically target Information Technology services, a sub-sector within technology.

Four advantages of investing in sectoral technology funds

Here are some of the key benefits of investing in the technology sector through mutual funds

• High growth potential: Technology mutual funds (sectoral or thematic) have the potential to outperform the market. They can offer some protection during volatility as technology remains relevant across economic conditions. Moreover, when economies are growing and there is increased funding on innovation and industry growth, technology can serve as the backbone for this too.
• Wide range of companies: Though sectoral funds in the tech sector focus solely on technology companies, they provide diversification within the sector. Moreover, technology serves as an important part of many other industries. Thus, technology mutual funds can invest in a wide range of companies operating in various sectors and sub-sectors, from software development to hardware manufacturing and healthcare.
• Professional management: A sectoral investing approach tends to be riskier than a more diversified portfolio that invests across market segments. This is because such investments are vulnerable to risks that are specific to that sector, such as regulatory changes and geo-political shifts, among others. Thus, it is important to have an adequately diversified portfolio and stay on top of market trends to manage investments strategically. This can be challenging for a retail investor. The professional management of a sectoral mutual fund can mitigate this risk as the portfolio is handled by investment experts.
• Technological innovation and global trends: The technology sector is influenced by global trends such as automation, machine learning, data analytics, and digital payments. Sectoral technology funds allow investors to potentially capitalise on these transformative trends, which can favourably impact long-term market performance.

Who should consider investing in IT funds?

You should consider investing in IT funds if:

• You can stomach market fluctuations and are willing to take on relatively higher risk for potentially higher returns.
• You want to invest for 5 years or more since sectors can be more volatile in the short term.
• You want to be part of the digital revolution and believe in the future of technology funds.

Why invest in technology mutual funds?

Here are the reasons why investors may consider technology mutual funds:

• Though a thematic fund is less diversified than a broad market funds, technology mutual funds can still access growth opportunities in a vast range of sectors, because technology forms the backbone of many industries
• Investing in a mutual fund is generally more cost-effective than buying individual technology stocks, especially for retail investors who want diversified exposure.
• Technology mutual funds are managed by experts who analyze the market, identify promising companies, and adjust the portfolio to adapt to changing trends, reducing the risk for individual investors.
• Technology is at the forefront of powerful global trends like digital transformation, green technology, and artificial intelligence, positioning investors to potentially benefit from these paradigm shifts

The future of technology funds

In India, the IT services industry has the potential to grow at a rapid pace due to factors like increasing demand for digital solutions, cloud computing, artificial intelligence, and IT outsourcing. Additionally, "Digital India" initiatives backed by the Indian government further support the growth prospects of technology companies. With the ongoing development of 5G technology and the rise of emerging tech trends like blockchain, cybersecurity, and fintech, the technology sector is poised for continued growth. This may create more investment opportunities for sectoral funds in the technology sector.

Why technology mutual funds are booming

The boom in IT funds can be attributed to several key factors:

• Digital transformation: With businesses increasingly relying on technology to drive efficiency and growth, the demand for IT services and tech products is on the rise.

• Remote work and cloud computing: The shift towards remote work and the rapid adoption of cloud services have further accelerated the growth of tech companies.

• The rise of startups: India's growing startup ecosystem, particularly in tech-driven industries like fintech, edtech, and so on, is another factor contributing to the boom in technology mutual funds.

Factors to consider before investing in technology mutual funds

• Risk profile: Since these mutual funds focus solely on the tech sector, they are more susceptible to market swings and sector-specific risks. Investors should carefully assess their risk tolerance before investing, especially if investors focus on a narrow space within technology, such as IT funds.
• Fund performance: Investors should  analyse  different mutual fund schemes by looking at factors such as historical returns (if available), fund manager experience, and expense ratios. However, it is important to note that past performance may or may not be sustained in the future.
• Market conditions: The performance of technology stocks is often influenced by broader market conditions. Global economic slowdowns, interest rate hikes, or sector-specific issues can impact the performance of sectoral funds, despite the sector’s defensive nature.

How to invest in IT funds?

If you are wondering how to invest in IT funds, here are some of the many options:

• Directly through AMCs: Many asset management companies (AMCs) in India offer sectoral-technology mutual funds that can be purchased directly via their websites.
• Through mutual fund distributors: Investors can also go through mutual fund distributors, brokers, or financial advisors to invest in tech funds.
• Choose from online platforms: You can choose one of the several online investment platforms available that allow investors to invest in mutual funds.

In conclusion, technology mutual funds offer an opportunity for investors to capitalise on the rapid growth of the technology sector. With its high long-term growth potential, global trends, and innovation-driving companies, the technology sector continues to be a key driver of economic progress. However, like all investments, they come with their own set of risks. Investors should assess their risk tolerance, investment horizon, and the market environment before making any decisions.

FAQs:

How long should I stay invested in sectoral technology funds?

You may consider staying invested in technology mutual funds for 5 years or more to mitigate the impact of short-term volatility and capture long-term growth potential.

Where do sectoral technology funds invest?

These funds invest in Indian companies within the technology sector, including IT services, software, and hardware.

Are technology mutual funds high risk?

Tech funds can be high-risk as they concentrate on a single sector. Market volatility, and sector-specific downturns or changes can lead to higher fluctuations in returns.

What are technology mutual funds?

Technology funds invest in companies within the tech sector, including IT services, software, hardware, and emerging technologies.

Is a sectoral technology fund good for long-term investment?

A technology mutual fund can be a suitable option for long-term investment in India due to the sector's growth potential, which is driven by digital transformation, innovation, and strong demand for IT services. However, it requires a high risk appetite.

What kind of returns can I earn from sectoral technology mutual funds?

Returns from sectoral technology funds in India can vary based on market conditions.

Should I invest in sectoral-technology mutual funds?

Investing in technology mutual funds in India can be suitable for risk-tolerant investors with a long-term growth horizon. It can offer high returns but comes with increased risk due to concentration in a single industry sector.

Is it good to invest in technology mutual funds?

The suitability of technology mutual funds depends upon your investment objectives, investment horizon and risk tolerance. If you have a very high risk tolerance, a long investment horizon, are optimistic about the growth potential of technology-related sectors and have a grasp on market trends and industry news, you may consider investing in such a fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.