Tech Funds, or sectoral technology funds, are mutual funds that invest the majority of their capital in companies in the technology field such as Infosys, Wipro etc.
With up to 32% annualised returns, equity-oriented Tech Funds have been among the top-performing mutual fund schemes in the last three years. However, returns from these funds in one year have been negative. As these funds predominantly invest in equity and related stocks of IT or technology companies operating internationally, their performance depends very much on the overall global market/economic condition. The technology sector has seen big corrections this year amid economic recession threats, emanating especially from the US and Europe. In this article, we break down everything that investors need to know before investing in tech funds in 2022.
What are Tech Funds?
Tech Funds, or sectoral technology funds, are mutual funds that invest the majority of their capital in companies in the technology field such as Infosys, Wipro etc. “These funds predominantly invest in equity and related stocks of IT. There are active as well as passive tech available in India,” says Rajani Tandale, Senior VP, Mutual Funds at 1Finance, a personal finance advisory firm.
According to Tandale, fund managers actively manage the portfolio under active tech funds. Under passive tech funds, the fund manager replicates IT Index like NIFTY IT Index, S&P BSE Teck index, etc. The expense ratio under active funds is around 1% to 2% and it is 0.2% to 0.3% in passive funds/ ETFs.
Should you invest in tech funds?
While tech funds have seen multi-fold growth in the last few years, you should not look only at trends before investing. “Investing is subjected to market risk, and you should not invest in any fund based on trends. We already have the example of an IT-led crash – the dot com bubble of the 2000s,” Anup Bansal, Chief Business Officer, Scripbox.
Experts say that performance of sectoral funds is cyclical, which may require timely entry and exit. Therefore, it is also important to seek professional advice.
“In the past 1 year IT sector has been corrected by more than 20% and this could be an opportunity to enter into this sector in a staggered way. SIP or STP modes are available for investors to begin their investments. However, all sector funds are cyclical which requires timely entry and exit. It is always advised to seek professional help to understand your risk appetite and the amount of allocation in your overall portfolio,” says Tandale.
“The IT sector-related stocks and funds have seen a slowdown lately after a stellar run during the last two years so you may look at investing during some of the dips. However, the objective is not to time the market but to focus on these funds’ long-term potential, and include them in your portfolio for diversification,” adds Bansal.
Two factors to consider before investing
Experts say that the answer to the question of whether you should invest in Tech Funds or not should depend on two factors:
Your goal and risk appetite
Constructing a portfolio according to your goals is the primary requirement of investing. If you have a long time horizon, you may benefit by investing in tech funds.
“Over five years, IT funds have given 15% to 19% annualised returns. However, these funds are risky as they are based on a single sector. The impact of rising interest rates tends to be higher on these funds. Any change, nationally or globally, can severely impact these investments. Hence, you should check your long-term investment goal and risk tolerance before including these funds in your portfolio,” says Bansal.
Experts say that you should analyse the existing asset allocation and diversification in your portfolio before including IT funds.
“IT funds serve as a great option to diversify your portfolio if you haven’t already included IT stocks in your portfolio. For example, suppose you already are heavily invested in the IT sector or work in the IT sector and have ESOPs with a weightage of more than 10% in your portfolio. In that case, you should rethink your investment decision to avoid concentration risk,” says Bansal.
Who should invest in Tech funds?
investors who have knowledge of the sector and the patience to stay invested for a long time may consider adding Tech Funds to their portfolios.
“One needs to understand that sector funds are highly concentrated in a single sector unlike other diversified mutual funds hence these could be extremely volatile. Timely entry and exit is the most crucial part of any cyclical funds. Investors who have knowledge about the market, economic situation and an eye for tracking the growth of the sector, and patience to stay invested can consider investing in sector funds,” says Tandale.