AI is reshaping industries worldwide, and India is no exception, with rapid developments in this field. The AI market in India is expected to grow at a compound annual growth rate (CAGR) of 25-35%, reaching approximately ₹17-20 billion by 2027. As AI gains traction, investors are turning their attention to digital funds specialising in technology and digital services.

Are these digital funds the next big thing in sectoral investments, or is the premature excitement? Let’s find out in this article.

What Are Digital Funds?

Digital funds are mutual funds that primarily invest in technology-driven companies. These companies operate in artificial intelligence, cloud computing, big data, cybersecurity, and e-commerce.  The objective is to capitalise on technological advancements and digital transformation across various industries.

Unlike diversified equity funds, digital funds have a sectoral approach, i.e., they focus on a particular industry rather than spreading investments across multiple sectors. This makes them a high-risk, high-reward investment option.

Performance of Digital Funds in India

Investor interest in AI and technology-driven funds has surged, with many showing impressive returns.

• Tata Digital India Fund: The fund has shown impressive performance, delivering a one-year return of 30 %+, while its one-year return is 7.16%
• Mirae Asset Global X Artificial Intelligence & Technology ETF Fund of Fund: Started in September 2022, this fund has gained 19.13% since its inception. The strong performance reflects increasing demand for AI-based investments.
• ICICI Prudential Technology Fund: This fund has delivered a five-year return of 33.46%, making it one of the top performers in the technology-focused mutual fund space.

Many other technology-based mutual funds have provided an average return of 6.45% in 2024, with Quant Teck Fund outperforming others at 12.20%.

Government Initiatives and AI Growth

Government-backed AI initiatives are accelerating digital transformation, fostering research, and improving infrastructure for long-term growth.

In the Union Budget 2025, a significant allocation was made to AI-related projects, indicating the government’s commitment to the sector’s growth. Key initiatives include:

• Expanding AI research through public-private partnerships.
• Creating a national AI computing infrastructure.
• Investing in AI-driven skill development programmes.
• Allocation of ₹2000 crore for FY26, marking a 1056% increase from the ₹173 crore in the 2024-25 budget.

These initiatives are expected to fuel AI adoption and, in turn, drive the growth of AI-focused companies and, as a result, digital funds.

Investment Considerations for Investing in Digital Funds

While digital funds appear promising, they come with certain risks and considerations that investors should evaluate:

1. Market Volatility: Technology and AI stocks are highly volatile due to rapid innovation cycles, changing regulations, and global competition.  While they offer high growth potential, they also experience sharp corrections.
2. Sectoral Risks: Unlike diversified funds, digital funds focus on a single sector, making them more vulnerable to downturns. A slowdown in the tech industry could lead to significant portfolio losses.
3. Diversification Strategy: Investors should not allocate their entire portfolio to digital funds. Instead, they should maintain a balanced investment strategy by diversifying across different sectors and asset classes. Using MF Screener, investors can compare different mutual funds and build a diversified portfolio.
4. Expense Ratios: It impacts net returns. Digital funds generally have higher expense ratios compared to diversified mutual funds.

• Tata Digital India Mutual Fund: 0.44%
• ICICI Prudential Technology Fund: 1.05%
• Mirae Asset Global X AI Fund: 0.95%

Higher expense ratios can reduce overall returns, making it essential for investors to compare different funds before investing.

Conclusion

Digital funds focusing on AI and technology have delivered strong returns, backed by substantial growth potential. However, their sectoral nature makes these funds more volatile as compared to the diversified funds. Investors looking for high-risk, high-reward opportunities can consider digital funds as part of their portfolio but should ensure proper risk management and diversification.