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:   

*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.

Also Read: Best Pharma Sector Mutual Funds to Invest in 2022

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 21^st 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. 

• Returns

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. 

Also Read: Best International Mutual Funds in India to Invest in 2022

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 . 

Final Word

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)