Which is a better way to invest in US technology funds -- diversified index fund such as S&P 500 or tech heavy NASDAQ 100 index fund or an actively managed pure technology fund?
Today’s world is most dependent on technology since the evolution of mankind. Schools, hospitals, transports, energy and almost all other segments cannot function without technology. Many individuals cannot live without their mobile phone for a day – such is the impact of technology on our day to day lives. Although computer based technology has been evolving for the last half century or so, the impact is very high in the last two decades after the arrival of World Wide Web.
It is a universal truth that while many new technologies make things cheaper to ultimate consumers, the same technologies provide huge margins to the owners of those businesses. For example, business people may be worried of keeping a net margin of 10 – 20% in traditional businesses. At the same time many technology companies shy away from doing business if the margins are less than 100%. Many times it is much more.
Any investor would be glad to grab onto high growth businesses with huge margins even though their valuations would be on the higher side. Such companies offering great scale and size are generally present in USA and China. There are no listed technology companies (excluding IT Services) in India which operates on a comparable scale. For Indian investors looking to park their money in technology stocks, USA is a more attractive overseas market, considering its openness, accessibility and transparency. Hence, it would be worthwhile to consider directing a certain portion of your investments towards US Technology Funds.
Some of these tech companies have grown in size tremendously. For example Apple’s market capitalization of $ 2.13 trillion is higher than the GDP of 188 countries on the planet. Many of us might think that the stock prices of these companies are in a bubble and hence may crash anytime similar to the dot com bubble. However, what we fail to understand is at that point of time stocks of many companies were flying high even without any revenue. Today, all these companies have real customers and real profit. Moreover overvaluation is a phenomenon not limited to tech stocks alone and does not necessarily foretell a bubble.
The point to note here is that these companies will keep growing and gaining market share even at the cost of existing traditional businesses. With Covid-19, many companies have moved a portion of their employees to work from home and hence the increased adoption of the services offered by these companies is inevitable. Indian investors may look at tech stocks from the following perspectives:
1. So far we are merely consumers of these tech companies. It is time to take part in the growth of these technology companies as well
2. Consider overseas funds as an asset class and allocate some portion to it
3. If you have children who might go overseas for their education, looking into foreign investments is not a bad idea
4. The correlation between Indian and US markets is very less and could offer good diversification opportunities
5. With higher inflation in a growing economy like India, it might be a good idea to have some allocation in dollar terms
By now, if you have made up your mind to invest overseas, the best bet would be through mutual fund route. Many fund houses in India offer overseas feeder funds. Now the question is if one would like to invest in diversified index fund such as S&P 500 or tech heavy NASDAQ 100 index fund or actively managed pure technology funds.
If you are particular about taking part in the technology story for the next decade, it is better to go with pure technology funds. Remember that these funds have done extremely well in the last decade and could do well going forward as well. However, these funds are akin to sectoral or thematic funds and hence carry higher risk than an index fund. If you are not too particular with focused technology funds, then you may consider investing in tech heavy index funds such as NASDAQ-100. If you still want to reduce your technology exposure, you may consider investing in a diversified index fund like S&P 500.
Investors should understand that investments in overseas funds involve dual risks of market as well as currency. However, the same are also opportunities in the longer term. Also, overseas funds come with debt taxation – meaning that you have to hold at least three years to avail long term capital gains taxation @ 20% post indexation.
(The author is Director, Prakala Wealth Management, a Chennai based financial planner.)
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