Karlo Duniya Mutthi Mein!
Does this tagline ring a bell in your mind?
This was 18 years ago when Reliance Infocomm forayed into telecommunication business.
Over the years, telecom and technology have bonded together. From 2G technology, India has moved to 3G, to 4G …and soon we will move to 5G. Data is the new ‘oil’ and so is software playing a pivotal role.
Mobile phones today are facilitating you to book a cab, order food, calculate how many calories you burned after a workout, read books, connect with friends via social media, perform banking & financial transactions …almost everything! Technology, indeed, is proving to be an enabler.
India’s digital economy is set to grow by leaps and bounds
With the focus on Digital India, a flagship programme of the Modi-led-NDA Government, with a vision to transform India into a digitally empowered society and knowledge economy, many companies from small start-ups to the large ones within India and abroad are taking a keen interest in the technology space, Information Technology (IT) included.
Three years since the launch of JioPhones in 2017, Reliance Jio Infocomm Ltd. has made huge investments to explore the opportunities in the technology space, plus attracted investments from the FAANG (Facebook, Apple, Amazon, Netflix and Google) league companies such as Facebook and Google.
Facebook bought 9.9% stake in Reliance Jio Platforms Ltd (the parent of phone and data unit of Reliance Jio Infocomm Ltd.) for Rs 43,574 crore in April 2020; and very recently, Google agreed to buy 7.7% stake in Jio Platforms Ltd for Rs 33,737 crore.
My article is not about Reliance Jio Infocomm. The larger point I wish to draw is several other companies are exploring the untapped opportunities in the technology space.
It is heard on the streets and was reported by the media that Amazon–again a company in the FAANG league–is in early-stage talks to buy roughly 5% stake (worth US$ 2 million) in Bharti Airtel Ltd.
Similarly, Apple products supplier Foxconn Technology (a Taiwan-based contract manufacturing company) is, reportedly, to invest US$ 1 billion in India.
Pegatron Corp (another Taiwan-based based contract manufacturing), assembler of Apple products, is in preparations to set up its first plant in India.
The entry of Foxconn and Pegatron, in particular, is part of a gradual shift strategy from China to India amidst trade war and geopolitical tensions prevailing, and this, in turn, is likely to augur well for ‘Make in India’ initiative and Atmanirbar Bharat (self-reliant India).
Looking to push electronic manufacturing in the country, the government recently announced US$ 6.65 billion incentives to attract global smartphone manufacturers and allied components. Currently, with only half of India’s population using smartphones, this incentive will be critical for ‘Make in India’ initiative and help India reduce its reliance on Chinese imports.
It appears that this is just the beginning, and many more companies in the technology space will look at India as an investment destination.
The COVID-19 pandemic has been a blessing in disguise for India’s digital economy. With lockdowns and travel restrictions to contain the spread of the virus, we have resorted to technology (in all forms).
E-commerce platforms have witnessed an increase in traction with people (including first-time buyers) transacting online, which otherwise would have taken at least 3-5 years more had it not been a pandemic situation.
Grocery stores and farmers chose to sell their goods online via various apps or allying with established e-commerce companies, bringing about a positive change.
With efficient use of technology, businesses will find new ways to operate, and reach out to their customers and sell their products and services.
India’s tech revolution will comprise of new-age tech companies, contract electronics manufacturers, e-commerce players, software companies, telecom service providers, internet service providers, media & entertainment, and other IT enabled companies closely linked to technology.
Leading IT companies in India have done reasonably well in Q1FY21 results. For companies with an export focus, the fall in the Indian rupee has helped counter the COVID-19-related shocks. Barring a few exceptions, most others have managed to pass the muster. And as the proportion of revenues derived from new technology grows, these companies are likely to do well in the future.
So, should you consider investing in Technology Opportunities Funds?
The opportunities in India’s digital space are plenty, but when you choose a Technology Opportunities Fund or a Digital India Fund, pay close attention to the portfolio characteristics of the respective scheme/s under consideration. This is because not all companies are well-placed to ride India’s tech boom.
Keep in mind, Technology Opportunities Funds or Digital India Funds are categorised as sectoral & thematic funds, whose fortune is closely linked to underlying companies held in the portfolio.
Some Technology Opportunities Funds have generated smart returns over the last 1-year and 2-year time period, outperforming their benchmark S&P BSE Information Technology – TRI; but over the longer time frames, they are yet to catch up.
Table 1: Technology funds Report Card: Smart returns generated over the last few years
|Scheme Name||(Absolute %)||Compounded annualised (%)||Risk-ratios|
|6 Months||1 Year||2 Years||3 Years||5 Years||7 Years||SD Annualised||Sharpe|
|Franklin India Technology Fund(G)||10.7||19.2||11.5||18.0||12.1||15.5||18.71||0.17|
|ICICI Pru Technology Fund(G)||4.6||6.3||6.2||17.0||10.5||17.5||20.70||0.14|
|SBI Technology Opp Fund(D)||2.6||8.8||8.9||18.1||10.7||16.0||18.34||0.18|
|Aditya Birla SL Digital India Fund(G)||2.4||11.1||8.8||18.5||12.5||16.9||20.29||0.18|
|Tata Digital India Fund(G)||2.2||7.4||7.3||20.3||–||–||20.72||0.19|
|S&P BSE Information Technology – TRI||7.2||10.8||10.6||21.2||12.0||16.1||21.1||0.2|
|S&P BSE 500 – TRI||-11.3||-5.2||-1.0||2.3||5.9||11.2||21.6||0.0|
Data as of July 17, 2020
Returns are point to point and in %, calculated using Direct Plan
Returns for period up to 1 year are expressed in absolute term, while for periods over one year are compounded annualised
Standard Deviation indicates Total Risk and Sharpe Ratio measures the Risk-Adjusted Return. These are calculated over a 3-Yr period assuming a risk-free rate of 6.50% p.a.
(Source: ACE MF, PersonalFN Research)
That being said, Technology Opportunity Funds or Digital India Funds have managed to outperform all diversified mutual fund categories. Although they have been more volatile than many of the diversified equity funds, investors have been meaningfully rewarded on a risk-adjusted return basis (as denoted by the positive sharp ratio).
The outperformance of select funds has come on two counts: one, exposure to overseas stocks that have been doing exceptionally well, and two, higher concentrated exposure to outperforming Indian IT companies.
Before you think of adding a Technology Opportunities or Digital India Fund, do note that any sectoral & thematic fund is not for the fainthearted. To put it simply, they are placed at the higher-end of the risk-return spectrum. If the sector does not perform as envisaged, it could weigh on your portfolio return.
Currently, the risk is that if the economic slowdown intensifies, it may be a setback for incremental spends and investments in the technology sector; not all companies may have the capacity to deploy capital. Plus the ongoing visa problems in the US, one of the major markets served by Indian IT companies, is another factor.
At present, Technology Opportunities Funds or Digital India Funds run a risk of concentration with some of them holding as high as 25%-39% of their portfolios in just one stock. That said, some of these Technology Opportunities Funds have also given investors the exposure to the FAANG league, which are not accessible to Indian investors otherwise.
If you want to take exposure to a Technology Opportunity Fund or a Digital India Fund and take advantage of India’s tech boom, ensure it does not exceed more than 10% of your entire equity mutual fund portfolio. Ideally, any Sectoral/Thematic fund should not be part of your ‘core’ mutual fund portfolio, and usually held only as a ‘satellite’ holding to add zing to the portfolio.
And before you add any mutual fund scheme, ascertain your risk profile, investment objectives, financial goals, the time horizon in hand to achieve the goals, and asset allocation best suited for you.
This article first appeared on PersonalFN here