Edelweiss Asset Management has launched a thematic mutual fund – Edelweiss Technology Fund, which can deal with investing in expertise and technology-related shares in India and overseas. The NFO, which opened for subscription final week, closes on February 28.

Basic contours

The fundamental premise driving the fund is that the newest developments in expertise are poised to generate among the most substantial impacts in historical past. Tech is permeating each business increasingly with every passing yr. Consequently, tech and associated shares dominate fairness markets globally. For instance, eight of the ten largest firms in MSCI World Index are from tech sector. Last week in our bl.portfolio version dated February 11, in our Big Story part we had additionally highlighted how the Magnificent Seven stocks (Microsoft, Apple, Alphabet, Amazon, Meta Platform, Nvidia and Tesla) with their prowess in technology have been the main drivers accounting for bulk of the value addition in the US markets over the last one year. With AI and associated developments, the clout of expertise firms is simply prone to improve.  

The fund will make investments 70-80 per cent in shares in India, whereas 20-30 per cent shall be invested in world tech firms.

However, it must be famous that this isn’t a pure expertise fund. For instance, the sectors in India that it’s going to put money into are renewables (electrical automobiles and renewable tech), IT (providers, BPO, merchandise), digital (Internet platforms and telecom) and EMS (IT {hardware}, good gadgets and IOT). Some of those equivalent to electrical automobiles, renewables, and EMS sometimes might not be expertise firms. In reality, even within the case of Tesla, the world’s finest EV firm as of now, there may be an ongoing debate whether or not it’s an vehicle or expertise firm. Its core vehicle enterprise doesn’t qualify it to be a tech firm. What leads to it getting bracketed as expertise firm is its intensive funding in creating software program for full self-driving automobiles and its Dojo tremendous pc.

For its worldwide investments, it can deal with investing in sectors equivalent to AI, Internet, semiconductors, robotics, and so on.

Our take

Thematically, there’s a case for such a fund that invests in tech and allied sectors. However, we imagine now shouldn’t be one of the best time for traders to make their transfer into this house.

In India and globally, the sectors that the corporate is planning to put money into have already had a stellar run within the final one yr and are buying and selling at what could also be unsustainable valuations in lots of instances, although the long-term development prospects seem attention-grabbing.

Consider IT providers, for instance, which may have a large share within the fund’s allocation — Nifty IT is already hovering near its all-time highs final seen in January 2022, at a time when enterprise tendencies stay sluggish and the administration commentary stays cautious. While valuation is decrease at trailing PE of 30.4 occasions right now than the 38-39 occasions in January 2022, it’s nonetheless 50 per cent greater than pre-Covid (January-February 2020) ranges of 19-20 occasions when development was really higher than now.

Similarly EMS firms which have been the fashion in the previous few years as Make in India and China+1 themes achieve traction, are buying and selling at PEs within the vary of 50-150 occasions.

Same is the case in relation to worldwide alternatives as nicely. The Nasdaq 100, which is bellwether for world expertise firms (though it consists of non-tech firms as nicely), trades at trailing PE of 35 occasions, a 30 per cent premium to its 10-year common. It was buying and selling at an analogous valuation at first of 2022, a yr through which the index crashed 35 per cent. While this isn’t to say there shall be deep correction this yr, it’s extra to point that the margins of security are low at present ranges in world expertise shares.

Bottomline

Many of those sub-themes of the fund already seem nicely found and have priced in rosy development prospects.   

While the fund may have its personal inside investing philosophies to determine good firms at an appropriate worth, given the elevated valuation ranges mixed with macro dangers at a worldwide stage in addition to sluggish development in sectors like IT providers, we suggest that traders wait and look ahead to now.