Technology Sector Mutual Funds

Technology mutual funds invest primarily in companies driving innovation in sectors like AI, cloud computing, software, and IT services. Ideal for investors with a high-risk appetite and a long-term investment horizon, they provide exposure to emerging technologies and global diversification. Let’s look at the best-performing funds in this sector and how you can choose one.

What are Technology Mutual Funds?

Technology mutual funds are equity mutual funds that invest in technology stocks. These include companies involved in IT services, artificial intelligence, cloud computing, software and hardware services.

Sectoral-technology funds are mandated by SEBI to invest at least 80% of their assets in equity and equity-related technology investments of technology companies. Popular companies in this sector include Tata Consultancy Services, Infosys, Wipro, etc.

Best Technology Sector Mutual Funds

List of the top-performing technology sector mutual funds sorted by returns with their AUM and Expense Ratio.

How do Technology Sector funds work?

Once an asset management company creates a new fund, it issues a SID (Scheme Information Document) stating key details of the fund. Investors gauge the fund's capability from this document and invest in the fund.

The ‘mutual fund’ now collected is deployed across technology stocks. Of the total corpus, 80% is invested in companies in the technology sector, and the balance is invested in other schemes at the fund manager’s discretion. This can include debt funds, other sectoral funds, REITs, InvITs, etc.

The NAV (Net Asset Value) of the fund changes daily based on its underlying assets (Technology stocks and other investments). The fund manager actively manages and rebalances investments in the fund as and when required.

Should I invest in Technology Mutual Funds?

The Technology sector has grown tremendously over the years. However, when you invest in a sectoral fund, you must be prepared for both the highs and lows. You should invest in the technology-sector mutual funds only if you align with the following characteristics:

1.  You have a high-risk appetite

The technology sector is highly volatile. This is because the technology space follows constant innovation, which means it can disrupt existing business models. Further, they are also influenced by market trends, cybersecurity policies and investor sentiments.

2. You invest for the long-term

Since the stocks within the technology sector are volatile, generating wealth or profit may require an investor to stay invested for the long haul. Moreover, emerging technologies like AI, and cloud computing can take years for widespread adoption.

3. You are looking for sectoral concentration

Technology mutual funds mainly focus on one sector - Technology. If you are okay with a sectoral concentration within this sector and are willing to diversify via other investment schemes, then this may be a good fit.

What are the benefits of investing in Sectoral-technology Funds?

High-growth potential: Technology funds invest in companies that are constantly innovating and creating new markets. This means that companies within this fund bring exponential growth and are set to overtake businesses that rely on traditional models.

Exposure to emerging tech: Investing in a technology-focused fund gives you an early mover advantage by tapping into companies driving disruptive innovations like AI, digital payments, and e-commerce. These firms are poised to shape future market trends and fuel long-term growth.

Participation in Global Markets: Some technology funds are also invested in global tech companies. This exposes investors to global market leaders and helps diversify and balance risks.

Are there any risks associated with investing in these funds?

High Volatility: The technology sector remains highly volatile for several reasons. Primarily, this sector is driven by high-growth expectations, meaning even a slight deviation from projected performance leads to sharp corrections.

Competitive Industry: This sector is constantly evolving due to fierce competition. Companies that are unable to adapt to rapid change can face significant business risks. 

How do technology funds compare with broader market funds?

Technology funds are typically benchmarked against IT indices such as the Nifty IT Index or the BSE TECk Index.

• Over the past few years, the Nifty IT Index has delivered an average return of 7.38% over 3 years, 30.82% over 5 years, and 15.16% over 10 years.
• In comparison, the Nifty 500 Index, representing the broader market, has generated an average return of 13.15% over 3 years, 23.05% over 5 years, and 10.67% over 10 years.

Broader market indices like the Nifty 500 focus on delivering moderate but steady returns due to sector diversification. On the other hand, IT indices tend to offer higher return potential but show greater volatility, especially in shorter time frames.

How to choose the best Technology-sector Fund to invest in?

When deciding which technology-sector fund is the best to invest in, you must look at the following metrics:

1. Past performance: Analyse how the fund has performed over the years. Draw comparisons between different funds and measure benchmark performance. Check whether the fund has met benchmark returns or not.

2. Fund manager expertise: Evaluate the experience and track record of the fund manager. Look at their past performance in managing sectoral or thematic funds and assess the returns generated over different market cycles.

3. Key financial indicators: Assess the fund by comparing key financial metrics such as Beta, Alpha, Standard Deviation, XIRR, and CAGR.

This detailed article talks about how you can choose an equity mutual fund for yourself.