What Is an Innovation-Themed Mutual Fund and How Does It Work?

Innovation mutual funds are thematic funds that offer exposure to companies at the forefront of innovation across sectors. These funds look beyond traditional sector boundaries to invest in businesses using innovation to create new products, services or ways of operating. This may include opportunities linked to areas such as AI, digitalisation, advanced manufacturing and other new technologies. However, their thematic nature can also mean concentrated portfolios, high valuations and greater volatility compared to more diversified equity funds. 

Innovation is becoming a big part of India’s growth story with the country ranking 38th on the Global Innovation Index in 2025 (Source: PIB). With initiatives across AI, semiconductors, quantum technology and research supporting the broader Viksit Bharat 2047 vision and India’s ambition to emerge as a global innovation hub. Investors looking to participate in this theme can explore innovation mutual funds.

In this article, we explain what an innovation fund is, how these funds work, where they invest, why they are gaining attention.

Innovation mutual funds are thematic mutual fund schemes that focus on companies working on new technologies, disruptive ideas and breakthrough research. These funds focus on investing in businesses that can transform industries through innovation.

Typically, innovation mutual funds schemes invests in businesses engaged in innovative areas like:

• Artificial intelligence and machine learning
• Biotechnology 
• Fintech and digital platform innovations
• Renewable and clean energy
• Other emerging innovative themes

As mentioned earlier, innovation mutual funds focus on identifying themes and businesses that are reshaping industries and have the potential to grow rapidly in the coming years. 

Here’s how an innovation mutual fund may typically work:

1. Identify innovation-driven companies

Fund managers of an innovation-themed mutual fund may start by assessing companies to check if they show strong innovative capacities. These companies may include businesses that are investing heavily in R&D, those creating new technologies, or developing products for new and emerging market requirements. 

2. Invest across multiple sectors

Instead of investing in just one sector, thematic innovation mutual funds can select businesses across sectors and industries based on the broader theme of innovation. This means an innovation mutual fund may invest in:

• A pharmaceutical company working on a new drug delivery technology
• A technology company developing AI-based solutions
• A renewable energy company working on green energy solutions

3. Assess long-term business potential

Apart from reviewing the innovative drive of the business, fund managers also assess if the business has long-term potential. This means evaluating things like:

• Business scalability
• Competitive advantage
• Adaptability 

Evaluating these factors, in addition to the innovative capabilities of the firm, may help fund managers see which businesses have sustainable growth potential. 

4. Active portfolio management 

Most of India’s innovation mutual funds follow an active management approach where the fund manager picks the companies for investment. The fund manager is responsible for continuously evaluating company performance, industry developments, and tech trends to make necessary portfolio adjustments. 

Understanding what is an innovation fund in the mutual fund market makes it quite clear why it may appeal to investors. To reiterate once more, here are the potential benefits of innovation mutual funds that may draw in investors:

• Gain exposure to innovative businesses

Innovation mutual funds offer a chance to invest in emerging trends and industries - like AI, biotechnology, and green energy - that may still be evolving. If these sectors perform well, the businesses may grow, and their valuations may rise, resulting in long-term growth potential. 

However, the reverse is also true. If the innovation is unsuccessful or the theme loses traction over the years, company valuations may be impacted. Therefore, the risk exposure is also very high.

• No need for active stock selection

If you had to build an innovation-themed mutual fund portfolio on your own, you would have to select stocks, evaluate company performance, track latest trends, and more. Innovation mutual funds help to avoid this hassle as professional fund managers handle all the research and stock selection, helping investors gain access to the innovation theme without needing to assess individual companies themselves.

• Diversification across sectors

Innovation mutual funds focus on the single theme of innovation, but they can spread investments across sectors where businesses align with this theme. This can help potentially reduce concentration risks that would arise by investing in a single sector. That said, there’s still the theme concentration risk you should understand. 

Investors seeking innovation mutual funds in India may consider the Tata India Innovation Fund. The Tata India Innovation Fund is an open-ended equity scheme following the innovation theme. The fund focuses on investing in companies that are at the forefront of innovation by creating new products/services or by inventive business models. The fund manager focuses on selecting companies that have potential for meaningful growth and a sustainable competitive advantage.

Here are all the key details about the scheme: 

To sum-up, an innovation mutual fund is simply a thematic scheme that focuses on companies that follow innovation theme. These companies may be engaged in emerging and innovative areas like AI, ML, biotechnology, smart manufacturing, or clean energy development. 

These funds work by:

• Identifying  companies that follow innovation theme
• Spreading investments across sectors
• Assessing the long-term growth potential of businesses

While innovation mutual funds may offer potential for better growth over time (if the emerging trend and business innovation performs well), they also carry very high risk of loss if the innovation fails or slows. As an investor, you should assess this risk exposure carefully before investing in innovation mutual funds. 

1. Are innovation mutual funds risky?

Yes. Generally, innovation mutual funds carry a very high risk. Some main risks associated with innovation funds include:

• High market volatility risk: Innovation-focused companies can see sharp price movements due to changing market conditions, technology trends and investor sentiment.
• Theme concentration risk: Since these funds focus on a specific theme, they have limited diversification and their performance may be adversely affected if the innovation theme underperforms.
• Valuation risk: Innovation-led companies may trade at high valuations, increasing the risk of sharp corrections if growth or earnings fall short of expectations.

2. Can I invest in innovation funds through SIPs?

Yes. Most innovation mutual funds allow SIP investments. However, the minimum SIP amount may vary by scheme, so remember to refer to all scheme related documents carefully before you decide to invest. 

3. What are the key factors to consider before investing in innovation mutual funds?

Here’s what you may consider before investing in innovation mutual funds:

• Your risk appetite and time horizon
• The fund’s asset allocation and expense ratio
• The fund manager’s experience
• Past performance of the scheme (past performance is not indicative of future returns)

Apart from these factors, all refer to all scheme related documents to understand all risks and key details properly.

4. Who should invest in innovation mutual funds?

Innovative-themed funds may be suitable for investors who:

• Are looking to invest in emerging/innovative technologies
• Have a very high risk appetite
• Can stay invested for a long-term period

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.