Weekly Musings – NFO Pick (Invesco India Technology Fund)

3 Sep 2024 , 01:12 PM

WHY INDIA IS IN A TECHNOLOGY SWEET SPOT?

The last we saw a slew of technology funds launched was way in 1999 and 2000 when the millennial technology boom was in full flow. A lot has changed in the last 25 years, but the basic attractiveness of technology funds are making a comeback. Here is why.

• India has world class IT outsourcing companies (most of them listed). Apart from the big names like TCS, Infosys, HCL Tech, Wipro, and Tech Mahindra; there are scores of mid-sized IT companies operating in very specific niches.
  
• Internet access in India has been rapidly expanding, thanks to the rise of smart phones. Between 2023 and 2028, internet access is likely to grow from 82 Crore to 106 Crore while smartphone users are likely to grow from 68 Million to 97 Million. In the same period, online shopper base will expand from 23 Million to 34 Million.
  
• If you compare the economics of data in India and the world, then average data consumption is nearly 50% more than the average global data consumption per month. At the same the cost of data in ₹ per GDP is about one-sixteenths the cost of data globally. Despite these low costs, telecom majors are raking in money.
  
• However, there is still a huge unfulfilled opportunity in tech in India. For instance, India has 58% access to internet compared to 75% in China. Smartphone usage in India is about 47% as compared to 73% in China while Indian online shoppers at 17% of the population is much lower than China at 60% of the population.
  
• There is a big demand for technology in India based on the middle-income and the upper income households. There are about 232 Million families fitting this bill. Also, India has around 18.4 Million unique users for food delivery apps, 5.1 Million for quick commerce, 8.7 Million users for online childcare, 3.0 Million for online fashion etc.

Having seen the supportive data for the Indian tech let us turn to the business metrics technology and digitization are seeing a boom.

INDIA TECHNOLOGY AND DIGITIZATION STORY

The demand story is one side. The other question is how is the industry managing to leverage tech in India, which is normally the key for a big tech push.

• One classic example of the rising role of technology in Fintechs is the rising of share discount brokers. For example, between FY19 and FY24, the share of discount brokers in stock market volumes has surged from 19% to 64%.
  
• Apart from discount broking, it has led to several spillover fintech effects. Between FY20 and FY24; demat accounts surged from 4.1 Million to 15.1 Million, unique MF investors from 21 Million to 45 Million, NSE active clients from 11 Million to 41 Million, and F&O investors from 1 Million to 4.5 Million.
  
• Engineering Research and development (ERD) isa new growth area for technology and that has grown at a CAGR of 11% in the last 5 years while the growth ERD exports has exceeded the overall IT services exports by 300 bps.
  
• Government initiatives like Aadhar, Umang, Fast Tag, BHIM, Rail Connect, National AI Portal have all been positive triggers for the growth of this segment in India. In the last few years, the government has spent $11.8 Billion in PSE tech initiatives, $5 Billion by cloud initiatives of government agencies, and $7 Billion on projects like ONDC, AI/ML, Blockchain, Digital Apps etc.

As a result, the emergent technologies like generative AI, cloud computing, robotics, virtual reality, cyber security, and Metaverse are making a big difference to tech opportunities.

TECHNOLOGY USE CASES ACROSS SECTORS

Here is a quick look at some of the key use cases for the application of technology in the Indian and the global context, which opens opportunities for Indian tech companies.

• Banks are adopting LLM (large language model) solutions to streamline operations and reduce costs; apart from delivering better services to clients.
  
• Manufacturing companies are investing in AR and VR technologies to allow engineers to interface with 3D models in real world environment to optimize projects.
  
• Retailers are promoting products through virtual showrooms, allowing them to expand and scale up in a more cost effective manner.
  
• Hotels and hospitality service companies are using spatial computing technology to offer virtual hotel tours for greater transparency with guests.
  
• Agritech companies are empowering farmers with data driven insights using GenAI for actional inputs to farmers on seeds, fertilizers, irrigation schedules etc.
  
• HR departments in companies are using GenAI for candidate screening, talent acquiring, and employee engagement and training in order to optimize HR tasks.

Industry has still just about scratched the surface on the immense applications of these methods in real life situations.

IMPRESSIVE STATISTICS MAKE THE CASE FOR IT

Some of the numbers pertaining to the Indian IT industry are truly impressive. Here is a quick dekko.

• Indian IT industry is roughly 7% of the all-India GDP, with a total tech sector annual revenues in the vicinity of $256 Billion.
  
• Tech export revenues are to the tune of $199.50 Billion account for nearly 50% of total service exports going out of India.
  
• Domestic tech revenues are at $54 Billion and growing at a rapid pace. India has 38,000 tech business units with about 58% share of global outsourcing.
  
• India has a fantastic start-up ecosystem. There are over 31,000 technology start-ups in India with total talent pool of IT at 5.43 Million.
  
• There are more than 1,630 global capability centres (GCC) in India. IT FDI flows stands at $6.3 Billion in just half year of FY24, while there were 3,18,000 patents in last 14 years.

Overall, this alluring technology story also comes with attractive valuations to boot. Tech sector has 24.8% ROE compared to 13.5% for Nifty 50 while revenue growth for IT is 14%, compared to 8.1% for Nifty. Also, IT has a much higher dividend payout ratio of 95.3%, compared to just 38.0% for Nifty 50, and net debt is much better than zero.

PERFORMANCE OF TECHNOLOGY FUNDS IN INDIA

Here is a quick look at how the active technology funds in India performed over 1-year, 3-years, and 5-years. We have considered the direct plans to avoid the distortion of total expense ratio (TER) differentials. There are 5 such active technology funds in India, of which we have ranked them based on 5-year returns. In all cases, the growth option has been taken as the benchmark to eliminate the reinvestment risk. Here are the 5 technology funds in India ranked on 5-year returns.

Scheme Name	NAV (in ₹)	Return (%) 1-Year	Return (%) 3-Years	Return (%) 5-Years	Daily AUM (₹ in Crore)
ICICI Prudential Technology Fund	235.86	44.67	13.07	30.00	14,226.11
Tata Digital India Fund	60.43	49.88	15.62	29.89	12,002.39
Aditya Birla Sun Life Digital India Fund	208.73	38.30	14.12	29.84	5,311.27
Franklin India Technology Fund	602.27	51.50	18.51	29.51	1,879.52
SBI Technology Opportunities Fund	243.80	39.30	14.72	27.76	4,390.13

Data Source: AMFI

The table above provides the performance of dividend funds in India, over 1-year, 3-years, and 5-years. There are a total of 5 active technology funds in India managing a combined corpus of ₹37,809 Crore between them. Here are some key takeaways.

• Let us first look at the returns on technology funds over a 1-year period. On a 1-year returns basis, these dividend technology funds generated maximum returns of 51.50% and minimum returns of 38.30%, which is a fairly attractive worst-case scenario. The average returns over a 1-year period was 44.73%, which is impressive. There was a 100% probability of being among best performing asset class among asset classes in India.
  
• Let us first look at the returns on technology funds over a 3-year period. On a 3-year returns basis, these technology funds generated maximum returns of 18.51% CAGR and minimum returns of 13.07% CAGR , which is a healthy worst-case scenario. The average returns over a 1 year period were impressive at 15.21%. There was a 100% probability of being in the best performing asset class over a 3-year period.
  
• Let us finally look at the returns on technology funds over a 5-year period. These technology funds generated maximum returns of 30.00% CAGR and minimum returns of 27.76% CAGR, which is healthy worst-case scenario. The average returns over a 5-year period were impressive at 29.40%; which is extremely low dispersion among players.
  
• Let us look at the break-up of the winners among active technology funds. If you look at 1-year returns, 2 out of the 5 technology funds earned more than the average. Over a 3-year period also, 2 out of 5 funds earned more than the average. On the basis of 5-year returns, an impressive 4 out of 5 funds did better than the average, which could be attributed to the sharply lower dispersion.

Active technology funds as a theme may not have attracted a lot of flows, but surely there is a strong case to invest; with prospects of beating the market comfortably.

GLANCE AT THE INVESCO INDIA TECHNOLOGY FUND NFO

Here are some details of the Invesco India Technology Fund NFO you must know to decide on investing in the fund.

1. The NFO of Invesco India Technology Fund opens for subscription on September 03, 2024 and will close on September 17, 2024. Being an open-ended active sectoral fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. The Invesco India Technology Fund is best suited to investors looking for long term outperformance with a focused exposure to technology related stocks. The sector has been under pressure over the last one year.
   
2. The core focus of the Invesco India Technology Fund is to generate alpha through active investments in technology and technology-related stocks. This also includes new age technology across different sectors, as well as the technology beneficiaries. The focus will be on long-term capital appreciation, through concerted technology sector stock picking, strong free cash flows and consistent track record of growth and profit margins. A holding period of 5-7 years at the bare minimum is suggested to realize full benefits.
   
3. On the Standard SEBI Risk-O-Meter, the Invesco India Technology Fund will be ranked as a Very High Risk Fund. The high risk is an outcome of the predominant exposure to equities (80% to 100%) that the Invesco India Technology Fund will have. In addition, there is the risk of entering into the markets at lifetime highs as well as the risk of focusing the entire portfolio on the theme of technology enablement.
   
4. The Invesco India Technology Fund is about generating long term capital growth through a number of technology sub-themes like automation, robotics, artificial intelligence, cloud computing, digital adoption etc. While the allocation will be discretionary, the theme is clearly defined. It will have an agnostic mix of large caps, mid-caps, and small caps in the overall portfolio, since the focus is less on capitalization and more on the technology theme. The fund will offer growth option and the IDCW option to investors.
   
5. Investors can invest in the NFO of Invesco India Technology Fund in minimum size of ₹1,000 lumpsum and in multiples of ₹1 thereof. This also applies to additional purchases and switch-ins. The fund also supports the systematic investment plans (SIPs), systematic withdrawal plans (SWP), and the systematic transfer plans (STPs) programs on a structured and long term basis. Monthly SIPs will have minimum requirement of ₹500, bi-monthly at ₹1.000, and quarterly SIPs at a minimum size of ₹1,500.
   
6. There is no entry load, and the exit load will be conditional. Firstly, there will be no exit load on any redemption after 3 months from the date of allotment. Secondly, any redemption within 3 months from the date of allotment will attract an exit load of 0.5% of the applicable NAV. This is being levied to protect the interests of continuing investors in the fund.
   
7. The Invesco India Technology Fund does not give any guarantee on returns and the performance of the fund is subject to the vagaries of the markets in general and the performance of the technology sector in particular. The Invesco India Technology Fund will be benchmarked to the Nifty IT TRI, which the fund managers will seek to beat to generate alpha. However, outperformance is subject to the market conditions and an outcome of the decisions of the fund manager.
   
8. The Invesco India Technology Fund will be managed by Hiten Jain and Aditya Khemani. The intent of the fund management team will be beat the Nifty IT TRI and generate alpha for investors through a rigorous process of stock selection and asset allocation. KFIN Technologies Ltd will be the registrars to the fund.

The Invesco India Technology Fund NFO offers an opportunity for investors to participate in the upside opportunity of technology stocks in India, amidst the growing digital opportunity. The companies will be on futuristic companies with strong cash flows and OPMs.

TAX TREATMENT FOR INVESCO INDIA TECHNOLOGY FUND

Here is how the taxation of the Invesco India Technology Fund will be done. This is pursuant to the changes made in the full Union Budget presented on July 23, 2024.

• Dividends declared (if any) by the fund will be taxed at peak rate of tax applicable. In addition, if the overall dividends exceed ₹5,000 in a year, they will be subject to tax deduction at source (TDS) at the extant TDS rates.
  
• Time frame for classification as long term capital gains (LTCG) will remain 1 year for the Invesco India Technology Fund. STCG (held for less than 1 year) will be taxed at 20% on gains plus cess at 4%, making effective STCG rate 20.80%.
  
• The LTCG on the fund (1 year holding and above) will be taxed at a flat rate of 12.5%. However, threshold exemption limit has been increased from ₹1 Lakh to ₹1.25 Lakhs. In this case, the actual tax impact will be 13% after including 4% cess.

It is what you earn from the Invesco India Technology Fund in post-tax terms that matters. That is why, it is essential to understand tax implications.