Investing in internet funds? Factors to track before taking the plunge

With no signs of a slowdown in new sectoral and thematic funds, asset management companies (AMCs) are now betting on a new breed of funds that track the performance of companies that conduct their business largely through online platforms.

These funds consist only of internet economy-linked stocks, having no allocation towards information technology (IT) and software companies.

Houses such as Edelweiss, Mirae Asset and Groww have launched funds on the Indian internet economy, with more launches expected.

Edelweiss BSE Internet Economy Index Fund was launched on April 24. Mirae Asset Nifty India Internet ETF and Groww Nifty India Internet ETF are exchange-traded funds (ETFs) and are in NFO or new fund offer phase. These funds have the BSE Internet Economy Index and Nifty India Internet Index as their benchmarks.

Since these are passive funds, they mirror their benchmarks, which might have different sectoral or stock compositions, leading to divergence in their performance.

Mind the benchmark

Both benchmarks offer investors targeted exposure to India’s internet-led growth story. However, there are stark differences.

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For instance, the BSE Internet Economy Index has nearly 26 percent weight assigned to the telecommunications sector, while the Nifty Internet Economy Index has no weightage for that sector.

In the Nifty India Internet Index, consumer services has the highest weightage at 63.10 percent, followed by financial services (35.37 percent), and media, entertainment and publication (1.53 percent).

On the other hand, for the BSE Internet Economy Index, consumer discretionary has 37.34 percent weightage, financial services 36.82 percent and telecommunications 25.84 percent.

Sectoral allocation

“The underlying benchmarks differ in methodology, constituents and structure. Some indices track only native businesses that derive revenue from digital/internet ecosystems, other indices have companies that depend on the internet for their service delivery and operations. Some of these indices are much more broad-based and include fintech and healthtech, etc,” said Ravi Kumar TV, founder of Gaining Ground Investment Services.

Due to the nature of digital businesses, there may be periods of divergent performance. Investors should consider if the underlying companies have quality business models that have clarity for profitability.

Many times, internet companies’ stock prices are narrative-driven. This narrative risk is also a key factor to consider. The universe in this segment constitutes B2C internet companies, B2C digital companies, digital enabling companies and digital supply chain companies.

Eliminating the IT sector

These funds typically exclude traditional IT companies not because they reject technology but because their emphasis is on businesses driving disruptive growth through digital platforms, network effects and scalable business models.

The aim is not elimination, but selection—targeting the next generation of high-growth companies rather than legacy tech players.

However, excluding all IT companies could risk missing out on quality growth opportunities, especially as some IT firms are evolving with strong digital propositions. A broader selection universe can benefit thematic funds in this space.

“Overall, internet economy funds can make sense as part of a thematic, growth-oriented allocation in a portfolio. But they should be seen as complements—not substitutes—for traditional technology or IT-focused funds,” said Kumar.

Other factors to consider

Though the benchmark selection is important for these kinds of funds, investors should check if the fund is truly aligned with the internet economy theme, and focus on the portfolio construct and the fund’s internal yardsticks for success.

Comparing funds purely on benchmark-relative performance may not work for this type of funds. All things considered, the investor is looking at absolute returns in such thematic funds.

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Investors should always look to put money in different asset classes and should go for diversified funds that invest across multiple sectors.

“Both the Nifty Internet Economy Index and BSE Internet Economy Index are lacking sectoral diversification as they are highly concentrated to limited sectors. Both indices are having 20 to 21 stocks in their underlying portfolio, which restricts it from diversification,” said Arjun Guha Thakurta, executive director, Anand Rathi Wealth.

Year wise Return Comparison

If we compare the year-wise return of the Nifty 50 with Nifty Internet Economy Index, we can clearly see that the Nifty 50 is more consistent in delivering returns while Nifty Internet Economy Index is highly volatile, ranging from a large negative to a significant positive return over three years.