Best Technology Mutual Funds to Invest in 2022
A technology mutual fund is a type of sectoral mutual fund in which the fund managers invest the corpus in the stocks of information technology (IT) companies. It is a special type of mutual fund that focuses on the technology industry or sector.
These funds aim to take advantage of favourable market situations in the tech sector to earn significant returns and capital appreciation over the long term. However, as the level of diversification in these schemes is low, they come with a higher risk level than other funds.
Read on to learn how technology funds work, their advantages, tax treatment and a list of top-performing technology funds.
Top Performing Technology Mutual Funds in India in 2022
Here is the list of the top performing technology mutual funds in 2022:
|Fund Name||3-year Compound Annual Growth Rate*|
|ICICI Prudential Technology Fund – Direct Plan – Growth||33.42%|
|Aditya Birla Sun Life Digital India Fund – Direct Plan – Growth||30.91%|
|Tata Digital India Fund – Direct Plan – Growth||30.39%|
|SBI Technology Opportunities Fund – Direct Plan – Growth||29.03%|
|Franklin India Technology Fund – Direct Plan – Growth||21.60%|
*The returns are as of November 7, 2022.
How Do Technology Mutual Funds Work?
The fund managers of technology mutual funds invest at least 80% of their funds in equities of companies related to the IT sector. As this sector has been one of the key drivers of the country’s economy, IT mutual funds have the potential to offer reasonable returns.
These mutual funds invest in companies dealing with technologies that have the potential to disrupt the tech sector with new advancements such as Artificial intelligence, machine learning, data analytics, IT, digital transformation, etc.
Who Should Invest in Technology Mutual Funds?
As these mutual fund schemes are focused on the technology sector or industry, investors with sound knowledge of the industry can consider investing in these funds.
If you are well versed in the dynamics of the IT sector and can devote sufficient time to keeping a close watch on the functioning of the stocks of IT companies, you can go for technology mutual funds.
However, as these are equity-oriented mutual funds, they will be volatile in the short run. Therefore, individuals with a long investment horizon can consider investing in these funds. Over the long term, the inherent risk and volatility of the portfolio might taper off and generate sufficient returns.
Again, the level of diversification in these funds is quite low, so the risk associated with technology funds is quite high. In the event of a downturn in the IT industry, there is no cushion to soften the blow. As a result, it may not be a viable investment alternative for risk-averse investors.
Advantages of Investing in Technology Mutual Funds
Here are some advantages of investing in a tech-based mutual fund:
- Growing industry
Information technology is one of the booming industries of the 21st century. The Indian IT sector has shown tremendous growth potential since its inception to become the torchbearer of India’s economic growth. Many activities like shopping, banking services and leisure have switched to the digital mode, giving massive business opportunities and growth potential for IT companies.
Therefore, investments made in technology-based companies can provide huge returns to individuals.
The fundamental principle of these funds is to outperform or outlast benchmark indices by investing in fast-growing technology companies. If this principle fails and tech companies are unable to compete with benchmark indices, investors may suffer significant losses.
On the other hand, if the IT sector enjoys a bull run, you can enjoy higher profit margins. Therefore, it comes with a high-risk reward ratio and the capability of giving good returns to its investors in case of favourable market conditions.
- Professionally managed
Technology funds are active mutual funds where fund managers play an active role in formulating investment plans and generating returns. The professional competence and management linked with these schemes provide convenience to aspiring investors who lack IT expertise.
Things to Consider while Investing in Tech Mutual Funds
Here are some factors that you should consider before taking any decision to invest in any IT mutual funds:
- Risk Appetite
These mutual funds have a high-risk component associated with them. The level of diversification is low and a significant amount of the assets are invested in stocks of only IT companies. So, any sudden unfavourable condition may spell doom for the portfolio. Therefore, you must analyse your risk appetite and invest in these funds only if you have a higher risk tolerance level.
- Investment horizon
Like any other equity fund, technology mutual funds are ideal if you have a long-term investment horizon. As equity-oriented mutual funds are volatile, investors will benefit if they remain invested for a long time. Therefore, individuals must compare or analyse their investment horizon with tech funds.
You can take a plunge into this mutual fund scheme if you are aiming to fulfil certain long-term objectives with these funds.
- Expense ratio
Expense ratio is a cost levied on mutual funds by asset management companies to cover their operational costs. These include administrative expenses, infrastructural expenses, fund manager’s fees, etc. The company levies the expense ratio as a percentage of the NAV of a particular fund. This has a direct bearing on a fund’s profitability, i.e., a higher expense ratio leads to reduced returns and vice versa. Being an active fund, tech funds tend to have a higher expense ratio.
- Fund Manager’s past performance
The fund manager controls the functioning of these funds. Their judgments directly affect the fund’s returns. It is crucial to examine the fund manager’s historical performance to see whether they have been able to deliver returns in line with the outlook.
Taxation of Technology Mutual Funds
As technology funds are equity-oriented mutual funds, the capital gains from these funds are subject to the taxation rules for equity mutual funds. The gains are subject to either short-term capital gains tax or long-term capital gains tax, depending on the holding period of these funds.
In cases where the holding period of these funds is less than 12 months, all gains are subject to a taxation of 15% plus applicable surcharges.
Whereas, if the holding period of these funds crosses 12 months or one year, proceeds earned from these funds are subject to long-term capital gains tax or LTCG. The rate of tax on LTCG is 10% without indexation benefits. However, LTCG is tax-exempt up to ₹ 1 lakh .
Technology mutual funds invest their corpus in the stocks of some of the top-performing IT and IT-related companies. Fund managers of tech funds try to take advantage of the burgeoning IT industry and the corresponding increase in their stock value. This detailed guide on the best technology funds to invest in 2022 will help readers take an investment decision wisely.
Frequently Asked Questions (FAQs)
How to invest in technology mutual funds?
You can invest in a technology fund by following these steps:
Step 1: Visit the branch office or online portal of the respective AMC/broker.
Step 2: Register on their platform by filling in your details.
Step 3: Complete KYC formalities and upload requisite documents.
Step 4: Choose the technology mutual fund that you wish to invest in.
Step 5: Select your preferred investment method – SIP or lump sum.
Step 6: Transfer the requisite amount from your bank account and purchase corresponding units of the technology fund.
How do technology funds work?
As per regulations of the Securities and Exchange Board of India, technology funds must invest at least 80% of their total corpus in the stocks of IT and technology-related companies. Fund managers will invest the total corpus in several stocks and create an investment portfolio. After investing, they will issue a certain number of units of these mutual funds to investors.
What is tax deducted at source (TDS) for equity funds?
As per Section 194K of the Income Tax Act, which became operational on April 1, 2020, all dividend income received by individuals from mutual fund investments is subject to TDS at the rate of 10%. However, dividends amounting to ₹ 5,000 are exempt from any TDS. As technology funds are equity-oriented funds, Section 194K is applicable to them.
What is SIP in mutual funds?
A systematic investment plan (SIP) allows investors to invest a small amount in a mutual fund at periodic intervals. Unlike lump-sum investments, SIP investments are organised and disciplined. This method lowers the cost of mutual fund units through the process of rupee cost averaging.