What are Technology Funds – Definition, Advantages, Taxation

Technology Funds, as the name defines are mutual fund schemes that invests in assets of companies involved in the sector of technology. It is a Sectoral Fund that invests primarily in equities of technological companies.

What are Technology Funds?

These funds invest in both stocks and debt securities of companies providing technology based products or services. It is usually an Equity Fund because of higher asset allocation to equities. Funds can be categorized into various types. For eg., large cap funds invest only in equities of large capitalization or blue chip firms. Similarly, Sectoral Funds are those that invest in specific industries or particular sectors of the economy such as in Banking or Pharma or Technology. Mutual Funds investing in the technological sector are Technology Funds. In recent years, Technology has been a growing sector, especially in developing countries and growing economies. In India also, the Technology Sector has seen a constant rise in GDP share and trade (export of technological products/services including IT, data analytics, digital transformation, etc.)

It must be borne in mind that Sectoral Funds and Thematic Funds differ. Thematic Funds are those funds that invest according to a particular theme and may encompass many sectors. For example, a Thematic Fund like Mid Cap Fund may invest in medium-sized emerging companies with growth potential but these firms may be from various sectors such as banks, IT or so, whereas as Sectoral Fund will invest only in a particular sector as FMCG and that may include debt and equity instruments as well as shares of all market capitalizations.

Read more: Sectoral Funds Vs Thematic Funds

Who should Invest

• If you have a high risk tolerance then you may go for this fund. All sectors go through ups and downs and due to the investment mandate, a fund will have to remain invested in technology based company stocks/securities even when this sector is performing poorly. When there’s exposure to diversified sectors, then the fund managers are able to shift funds from under performing sectors to the performing ones. Technology funds have higher volatility than diversified funds
• Also, it is suitable for investors who have more knowledge about markets and macroeconomic situations. If you have patience and an eye for tracking the growth of various sectors in the market then you may go for a Sectoral Fund. You need to check if technology based stocks and funds are performing and worth investing in
• Technology and especially Information Technology is one of the most flourishing sectors for the past few years and almost all global IT firms have established themselves in India. It is also quite a popular investment sector and has seen tremendous growth, so in current scenario you can invest in Technology Funds
• If you are ready to stay invested for a long term for any sector needs adequate time to grow. Short term investment is not advised by the experts in Technology Funds

Advantages of Investing in Technology Funds

• High Risk-Reward Ratio

Technology Funds have the main objective to outperform equity funds by staying invested in the Technology sector as it is one of the growing industries. All Sectoral Funds have the prime agenda to outdo diversified funds if fund corpus is invested in a specific sector which is expected to grow in recent years. If this viewpoint fails, then the fund may suffer a heavy dent on its returns, but may beat the market returns of other equity funds if that sector booms. Therefore, it has a high risk-reward ratio

• Focused

Technology Fund, as any Sectoral Fund is focused on one sector. There is not much diversification offered. All sectors go through market cycles and perform accordingly, and when a particular sector is growing, funds that focus on growth sectors give maximum returns and boosts up the margin from the benchmark and other mutual funds. Technology sector has given consistent results over the years

• Investment pan Market Capitalisations

It is focused on one sector but not one capitalization. It invests primarily in Technology based company shares but firms of all sizes varying from large cap to medium to small. It depends from different schemes and AMCs if they would invest a major part of the corpus in any one market capitalization or keep it diversified throughout

Disadvantage

In spite of the above mentioned benefits of the Technology Funds, it must be noted that if the Technology sector fails to perform, then returns will be affected adversely and as a Focused Fund, it can’t invest in other sectors and revive. It depends entirely on the performance of one sector. Technology or any Sectoral Funds are advisable for educated active investors who keep an eye on market movements and growth of different economic sectors. If a wrong sector is chosen it will adversely affect the portfolio returns. Experts usually suggest diversified equity funds and it is not suitable for new investors or investors with low risk appetite.

Things to be considered before investing

Every investment requires a sufficient amount of research and valuation of factors such as risks involved, history of returns accrued, business proficiency of the holdings etc. Here are some of the things which must be considered by an investor before investing into the Mutual Funds:

1. Financial Goal– Before making any investment decisions, it is very important to evaluate that the fund objective is aligned to your financial goals. If you are ready to take high risks as well as can analyse the market to foresee if the Technology sector will grow then you may invest in this fund. It is a high return giving but a highly risky fund
2. Fund Performance– Measuring the performance of the fund in both bullish and bearish market situations is a necessity as it helps the investors in selecting a reliable fund. Technology Funds have grown in recent times and hence are popular among investors. India as a developing economy and strong IT base has seen some high returns from investments in this sector. However, it must be checked if a fund can continue to perform in upcoming market cycles
3. Fund House & Management– There are numerous Mutual Funds regulated by different AMCs (Asset Management Companies). Fund houses & Fund Managers play a very decisive role in the allocation of assets and selection of stocks. If the management has enough experience and expertise, the fund will easily sail through promising market conditions and deliver good returns
4. Costs Involved– There are different costs involved in Mutual Fund investments such as Expense Ratio, Entry Load and Exit Load. Investors must review these costs before heading up for investments
5. Other Basics from the Portfolio: There are other different factors such as the fund NAV (Net Asset Value), AUM (Assets under Management) etc. which are to be viewed to make sure of the reliability and investor engagement in the fund

Top 5 Technology Funds to invest in 2020

(Source: Value Research, as on Feb 6, 2020)

Also, these funds are perhaps the only Technology Funds in the Indian market.

Taxation

The taxation depends entirely on the portfolio construction. Usually, Technology Funds are majorly invested in Equities and if 65% of the corpus is allocated to equities, it is treated and taxed as an Equity Fund. In case, if 65% of the portfolio consists of debt securities, then they are debt-oriented and are taxed as one.

If taxed as an Equity Fund:

If an investor has made a capital gain of ₹50000 on investment in an equity fund, Short Term Capital Gains Tax of 15% would be levied if s/he withdraws the amount within one year of investment. The payable tax would be ₹7500. 

Also, if an investor has made a capital gain of ₹1.5 lakh on investment in an equity fund, and withdraws the amount after 1 year of investment, Long Term Capital Gains Tax of 10% would be levied on ₹50000. ₹1Lakh is exempted from taxation. The payable tax would be ₹5000.

If taxed as a Debt Fund:

If an investor has made a capital gain of ₹50000 on investment in a debt mutual fund and withdraws the amount before 3 years of investment, Short Term Capital Gains Tax would be levied, as per the income tax slab of the investor. ₹50,000 would be added to the taxable income of the investor and taxed accordingly. 

If an investor withdraws the investment including capital gains post 3 years of investment, 20% Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation. 

Indexation reduces the value of overall Long Term Capital gains to reflect the effect of inflation on your investment. 

To calculate the final value of capital gains post indexation, we use government’s Cost Inflation Index (CII) in the following formula:

Indexed cost of Acquisition = Investment Amount * (CII of the year of withdrawal/ CII of the year of investment)

Suppose the investment amount is ₹70,000 in the year 2016 and the withdrawal  amount is ₹1 Lakh. The value of capital gains is ₹30,000 before indexation 

Indexed Cost of Acquisition = 70000* (280/254) = 77165.35

Note: CII in the year 2015 = 254

          CII in the year 2018 = 280

Final Value of Capital Gains= 100000- 77165.35 = 22834.65

Tax Payable = 20% of 22834.65 = 4566.93

Technology Funds are usually Equity Funds

How to Invest in Technology Funds

• Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
  • Identity Proof (Aadhar Card)
  • Cancelled cheque
  • Passport size photos (around 4-5)
  • PAN Card
  • KYC documents (for KYC verification)
• Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment

For detailed information on how to invest in mutual funds, click here