Technology Mutual Funds and How They Work

Mutual Funds which invest predominantly in technology companies are also popularly known as technology funds. They can invest in both debt and equities of these companies.

What are Technology Funds?

Technology funds usually invest in equities of technology companies. They usually try to bet on new emerging technologies which are likely to disrupt the tech world with new innovations. ICICI Prudential Technology Fund, SBI IT Funds and Aditya Birla Sun Life New Millennium Fund are examples of some prominent Indian technology funds.

Their portfolio consists of tech companies like Infosys, HCL Technologies, Tech Mahindra, Mind Tree etc. Most of the companies in these funds operate in the domain of solving complex business challenges with breakthrough technical innovations. These include IT, digital transformation, data analytics, Artificial Intelligence and Machine Learning.

 The Popularity of Technology Funds

Since the last few years, technology funds become quite popular in terms of investment opportunities. This is owing to a constant increase in IT sector in the GDP share and continuously increasing exports of IT products and services. As per NASSCOM report the domestic revenue of the IT was pegged at US$ 38 billion while the revenue from export was estimated at US$ 117 billion in FY17.

Suitability

Technology funds in India have consistently provided an annualized return of 14% to 19% over a five year period. With such a decent return, these can serve as a good diversification option for investors looking to cash in on the ever-growing technology sector in the country. A comparative performance of prominent Indian Technology funds is shown below:

Open-ended Equity: Technology – Return Five Year – Top 10 

Taxation

Just like any other fund, the taxation of technology funds also depends upon the quantum of the portfolio invested in debt or equity. If at least 65% of their portfolio is invested in equities, they are treated as equity funds for taxation. So short-term capital gains meaning the gains booked with one year of the equity-oriented hybrid funds are taxed at 15%. If these funds are held for a period more than 12 months, their long term capital gains are taxed at 10% if the gains booked exceed Rs. 1 lakh (as per the latest budget of 2018). In case they are debt oriented, that is if their portfolio consists of at least 65% debt securities, they are treated as debt funds. This means the long-term capital gains tax is applicable if the fund is held for 36 months or more. However, most technology funds are equity-oriented.

Technology funds being equity oriented mostly – Capital Gains Tax Rates explained

As an investor, it helps if one has a basic understanding of the technological space in which the tech companies operate. If one has the ability to foresee how these new technologies can disrupt existing businesses, then one can make enviable capital gains by selecting the right technology funds.

The Future of Technology Funds

In June of 2017, the S&P 500 Index (Standard & Poor’s 500) was up by 8%, while the FANG stocks (Facebook, Amazon, Netflix, Google) were up 25-30%. Technology is the way forward and the trends are very promising. The growth in the PC and smartphone market is expected to be slow since the market has already been saturated. However, newly evolving sectors like cloud computing and AI (Artificial Intelligence) which are disrupting traditional technologies are taking over and will be the golden geese of the future.

The growth of the tech sector was predicted in 1965 by Intel co-founder Gordon E. Moore. His ‘Moore’s Law’ states that every two years we would have the means necessary to double the number of transistors on a single chip. And while a single chip may not look like much, when you apply this ‘law’ to the technology sector as a whole the prospect for growth and disruption is mind-boggling! And as every good investor knows, disruption creates new opportunities for investments which is why technology mutual funds are in such demand right now.

Conclusion

The technology sector is continuously growing, so its true that some of your investments may face some near-term headwinds. However, experts project that in the coming days, technology mutual funds will have the capacity to outperform global equity funds. Hence, if there is one sector you need to keep your eyes peeled for, then this is it! Here’s a list of the top tech mutual funds in India you could choose to invest in (as of 31st may, 2018):

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