If there is one thing we cannot ignore, it is the rapid increase in digitization and innovation across the globe. Spurred by the pandemic, this tech wave has led to positive growth in the sector. In reflection of this emerging trend, technology sector funds in India have delivered over 40% returns over the last year.
Everything is turning Tech today; we have FinTech, FoodTech, AdTech, EdTech, Healthtech, Insuretech, and more. The emergence of these organizations has led to the growth of the IT sector at large. To make sense of this robust growth in the IT sector and decipher how we as investors can gain from this tech wave, we talked with expert fund manager Mr. Raunak Onkar who is the Co-Fund Manager & Research Head at PPFAS Mutual Fund.
We deep-dived into the tech sector by covering the below pointers:
- Why should investors consider investing in Technology as a theme?
- What are the different types of tech-based investments?
- How and where to invest in Tech?
- As investors, how can you value Tech?
Here are brief pointers disucssed:
Why should investors consider investing in Technology as a theme?
- Transformative trends – Investing in technology allows us to participate in long-term transformative trends changing our lifestyles and economy. Consider the transformation from the traditional telephone to today’s iconic iPhone.
- New businesses – Technology powers everything; across different industries and varied business models. Take, for instance, the rise of platforms that build bridges between product or service manufacturers and consumers.
- Double on productivity – Invest in tech businesses that improve productivity. Like, the smartphone which is a single device used for various productive purposes beyond mere calls and texts.
- Long-term view – Investing in technology that will modify human behaviour and preferences over the long term.
What are the different types of tech-based investments?
- Innovation – You could choose to invest (as VCs) in truly new (innovative) technology or new business models that could scale.
- Hardcore Tech – Investing in hardcore tech-based manufacturers with solid barriers to entry.
- Technology manufacturers – Investing in businesses that manufacture chips, devices, auto components, or even outsource technology. (E.g: An apple iPhone and its components)
- Beneficiaries of technology – Investing in organizations that are beneficiaries of emerging tech wave, like mobile phones gaining traction from eCommerce, media streaming, communication, etc.
- Latest products/service – Latest Tech-based emerging platforms that are asset-light businesses with high scalability.
- B2B or B2C Product or Service – Invest in new trending business models and services that bank on evolving technology like FB, UPI, Uber, Salesforce, AirBnB, etc.
How and where to invest in Tech?
Equity – The most straightforward way, both as a Public Equity or Private Equity investor, is by investing in the company’s shares through direct equity either in local domestic markets or global markets. While this is the easiest route to enter, it can be a challenge to track or manage.
MFs & ETFs – Another way is through funds that track technology as a theme in Mutual Funds or ETFs. ETFs are a low-cost method to invest in these funds that track a thematic index; the drawback is unlike Direct Equity, you may not be in control of the underlying asset allocation.
Partnership – If you have a large amount of capital at your disposal, you could choose to invest as a partner through venture capitalists or private equity firms in future-ready businesses. The drawback here is the long-term investment and the illiquidity or risk of loss of capital.
Venture Debt – This is an indirect and far more complicated method of investing in a tech firm, where you end money to an NBFC, which lends the capital to tech businesses and offers you a fixed percentage of return on the investment. The risks involved are far more since companies invested in may be at a nascent stage.
While investing through either of these options, you must keep in mind your understanding of the business, risk appetite, and capacity to manage volatility before you venture ahead.
As investors, how can you value Tech?
The valuation matrix and expectations from the business differ and depend on the route you may choose to invest in. As a VC, you may have a different outlook of the business, while as an ETF investor, you may view the business in a different light. Knowing your investment strategy and ability to stomach volatility will give you insights into the suitable investment routes and businesses you should invest in.
Knowing how technology is evolving rapidly, as an investor in the tech domain, you should keep abreast with the latest tech trends to ensure your investments continue to remain in trending and evolving businesses rather than in obsolete ones.
While cash flow may not be specific to thematic investments alone, while investing in businesses, your knowledge of the industry will give you a gist of the business’ future prospects and its potential to deliver returns in the long term. This overview gives you a ballpark range of future cash flow that you could expect from your investments in the business today. It also allows you to create exit strategies to ensure your assets are hedged against future risks.
For more in-depth information watch the session here: https://bit.ly/2Xc3feV