Innovation Funds: Understanding the New-Age Investing Approach

One of the major benefits of innovation funds is that they may offer you exposure to “emerging industries/ sectors”, such as artificial intelligence, biotechnology, and renewable energy. These sectors are changing how the world works and are expected to grow in the coming years. 

Thus, by investing in such funds, investors get a chance to potentially benefit from the long-term growth of such businesses. Additionally, some other benefits you may realise are:

1. No Need For Active Stock Picking

   Innovation funds are managed by professionals who closely track:

   • Technological trends

   • Funding/ capital seeding abilities

   • Company performance

     In active funds, the Fund Managers regularly review and adjust the portfolio based on new opportunities or market changes. Such an active approach eliminates the need for retail investors like you to track the markets. 

      

2. These Funds May Have a Balanced + Diversified Portfolio

   Although innovation funds focus on advanced technology themes, they may try to spread their investments across multiple industries and companies. This diversification aims to reduce concentration risk as losses in one area may be offset by gains in another. However, investors still face the risk of concentration of their investments in a particular theme, i.e, the innovation theme.

    

3. You May Gain Access to “Industry Disruptors”

   Innovation funds may invest in companies that have potential to grow over time. Many of these companies are still in the early stages of developing new technologies or products. If these innovations succeed, then it may also benefit their valuations over time. However, if their innovations fail, then it may have an adverse impact on their valuations.

   Be aware that the primary goal of innovation funds is to identify and support future market leaders before they become mainstream.

    

Realise that each innovation theme faces its own set of risks. For example,

• Clean energy companies depend on consumer adoption and government incentives

• Technology firms rely on constant innovation and face intense competition. 

Now, if a technology fails, adoption slows, or a new competitor enters the market, it may hurt company performance and, in turn, reduce the innovation fund’s returns. 

Known as “theme-specific risks”, these disruptions make such schemes more unpredictable in the short term.

Besides, there are also some other risks you must be aware of. For example:

1. You May Experience High Volatility

Innovation funds may invest in companies that are still emerging. Their prices may fluctuate sharply due to several reasons:

All these factors may lead to short-term losses even if the long-term outlook is strong. Thus, these funds may be more suitable for investors with very-high risk tolerance.

2. You May Get Exposed to Overpriced Market Segments

High-growth industries often attract strong investor interest. This may push a company’s valuation higher than its actual business performance (or intrinsic value). 

At some point in time, if market sentiment changes or growth expectations are not met, it can trigger a market correction. This can lead to a decline in the Net Asset Value (NAV) of innovation funds. Due to this “overvaluation risk”, investors could face short-term losses even if the underlying companies are fundamentally sound.

3. Availability of Limited Historical Data

Many sectors targeted by innovation theme based mutual funds (say robotics or electric mobility) are still young. They have not been in the market for long, and thus, there is limited data to understand how they perform under different economic conditions. 

This makes it harder for fund managers and investors to assess long-term stability and risks compared to more established industries.

Innovation funds may be suitable for long-term investors with a very-high risk appetite. That’s because innovative sectors (say biotechnology or renewable energy) often take years to reach their full potential. As a result, these funds may not deliver consistent short-term returns. 

If you are planning to invest in innovation funds, it is important to keep the following factors in mind before committing money:
 

1. Review Past Results Carefully (Fund Performance)

By examining an innovation fund’s past performance, you can understand how it has handled different market conditions. Data from the Association of Mutual Funds in India (AMFI) shows how funds have performed historically. 

While past returns do not guarantee future results, consistent long-term performance may indicate:

• Disciplined fund management approach
• Effective risk handling during market volatility
• Strong investment strategy + stock selection
• Ability to deliver potential long-term returns
   

2. Understand the Costs Involved (Expense Ratio)

Innovation funds are usually “actively managed”. Their fund managers research and adjust portfolios regularly. This often leads to higher management fees, known as the expense ratio. 

As an investor, you may compare this cost with similar funds (peer comparison) and consider whether the potential returns justify the higher expenses.

3. Assess the Fund Manager’s Skill (Fund Manager Expertise)

Like with all the actively managed schemes, the success of an innovation fund also depends on the fund manager’s knowledge and decision-making ability. A skilled manager can

• Identify new trends early
• Better evaluate emerging companies
• Timely adjust the portfolio when market conditions change

On your part, you can review the manager’s experience + past track record to pick the right innovation mutual fund option. 
 

It is an open-ended equity scheme following the “innovation theme”.  The inception date for this scheme is 28 Nov 2024, and may provide investors with opportunities for long-term capital appreciation. It could invest in equity and equity-related instruments of companies that seek to benefit from the adoption of innovative strategies and themes. 

However, the fund does not guarantee returns or ensure that the stated goal will be fully achieved, as market performance can vary. Some key features of the Tata India Innovation Fund are:

1. Benchmark

The Tata India Innovation Fund is compared against the NIFTY 500 Total Return Index (TRI), which may give a broad view of the Indian stock market. It tracks the performance of the 500 largest companies in India based on market value (total free float). This index is calculated in real time and reviewed twice a year. Source: NiftyIndices.com

2. Exit Load

If you redeem or sell your investment within 30 days from the date of purchase, a fee of 0.50% of the redemption amount is charged. Whereas, if you withdraw after 30 days, there is no exit load. 

3. Risk Level

This scheme carries a “very high risk” level. As an investor, you may consider this fund if you can handle high volatility and have a long-term investment horizon.

So now you know that innovation funds are a type of thematic fund that focuses on innovative sectors such as artificial intelligence, biotechnology, renewable energy, and other emerging technologies. 

Such financial products may offer potential return when these themes perform strongly compared to general diversified funds. However, at the same time, investors may face higher losses if these innovative sectors underperform.

Thus, to pick the right innovation fund, you should:

• Assess your risk appetite

• Check the fund’s past performance

• Review the expense ratio and exit load

• Evaluate the fund manager’s expertise and experience

If you are looking for an option, you may consider the Tata India Innovation Fund, which allows you to invest either through a lump sum or a Systematic Investment Plan (SIP). You can invest in the scheme through both Direct and Regular plans. Both these plans offer Growth, IDCW (Income Distribution cum Capital Withdrawal) Payout and IDCW Re-investment options.

• The views mentioned above are for information & educational purposes only and do not construe to be any investment, legal, or taxation advice. Investors must do their own research before investing. 

• The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. Any action taken by you on the basis of the information contained herein is your responsibility alone, and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. 

• Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.