Tech Mutual Funds are Hot – Should you invest in them?
Technology sector funds are a hot property right now; their market evaluations shoot through the roof due to immense amount of investor expectations. Tech mutual funds are a part of new-economy stocks that are heavily inclined towards the tech sector. As compared to the old-economy stocks that invest in well-established companies with little or no investment in technology, these new-economy stocks report higher future earnings estimates because they are expected to grow at faster rates than the stocks of a typical brick and mortar company.
The tech sector has given an average return of 14.30 percent in the past year and 23.31 percent in the past three years. The top three performing tech mutual funds as on July 2016 on the basis of 3-year returns are ICICI Pru Technology Fund (26.86 percent), Franklin Infotech Fund (20.99 percent) and Birla SL New Millennium Fund (22.31 percent). On a five-year perspective, the tech sector has delivered 13.78 percent.
The Indian IT service export companies show good earnings, even more so than their peers across the globe. The fact that India’s currency is in a depreciation mode against the US Dollar has actually worked in the favor of the tech sector. Nasscom predicts that the Indian tech industry will grow at the 12-14 percent in the year 2016.
The fact that mobile technology is growing by leaps and bounds in India is testimony to the overall tech growth story. There have been valiant strides in the field of cloud computing and social media as well. Some of the growth areas include app development, content building, risk management, legal framework and compliance.
Is the honeymoon going to last? Well, tech companies that adapt themselves well to changing environments will, but there is a possibility that many of them will be burdened by over-expectations. Experts believe that the tech industry is in a transitional phase. The existing revenue streams can be disrupted with new and emerging technologies.
Ideally, investors should exercise caution while investing in the tech sector because it is extremely volatile. It is better to invest in a diversified equity mutual fund which gives enough exposure to IT sector while having exposure to other sectors too. Your total equity portfolio should not have more than 10 percent of allocation to tech funds.
For the ones who are desirous of investing in a tech sector fund, it is important to look at underlying stocks and their investment strategy. Look out for a fund that invests in solid companies which may be undervalued. The portfolio should be strong and the fund management team should be stable and proactive in stock-picking. Even in tech funds, there are differences, wherein some are totally concentrated on the IT sector, while others have a more broad-based mandate of investing in IT, telecom and media. So, it is important to get a clear idea of the mandate before investing. Look out for a fund that has given good-risk adjusted returns on a long-term basis. It should also be a proven fund with results that surpass benchmarks across various market cycles.