Innovation Fund: An Interesting Take On Innovating Companies

In a fast-changing world, businesses will not thrive sustainably without innovating themselves as per the time and customers' needs amidst stiff competition. The innovation here means renewing and successfully implementing new ideas while creating value for customers as well as shareholders. This is a move which is being fast adopted by companies across the sectors around the globe.

Not only does an innovative approach help companies stay relevant by way of innovative products, new processes and updated business dynamics, but it also helps them to grow with increased efficiency while keeping the costs low. Thus, innovation adds yet another dimension for growth, often rapid in nature, making it an interesting case for investments.

Often, innovation is assumed to be purely technological, which is nothing but a myth. Rather, innovation can be as simple as the invention of the wheel to complex and modern techniques such as DNA re-arranging. There are ample examples of innovation in history which demonstrate how businesses turned successful and long-lasting by adopting the path of innovation.

For instance, the changing face of railways—from steam locomotives to diesel engines and thereafter a transition into electric engines—clearly shows how the rail mode of transport continues to assert its relevance. On the other hand, a jump in technology from desktop computers to tablets is one of the latest and finest examples of innovation by tech companies. Similarly, the world is full of such innovative upgrades—be it in banking, internet services, consumer durables or automobiles, among others.

Typically, there are three types of innovation—radical, disruptive and incremental. When a product like a camera is altogether replaced by a new product, say the smartphone, the innovation is radical. A disruptive innovative approach involves offering new affordable products like washing machines and refrigerators that can cater to a large customer base. Incremental innovation brings up upgrades to existing products, services, processes and methodology. An upgrade from an old TV box to LCD and then to an LED TV screen is a perfect example of incremental innovation.

Why consider innovation as a theme for investments?
Presently, there are several undercurrents that favour innovative themes. The pandemic taught us the importance of supply chain diversification as a series of innovative steps were taken domestically. Furthermore, the ongoing geo-political tensions leading to uncertainties have led countries to look for better options to reduce dependencies. Meanwhile, the elevated levels of inflation globally are forcing countries to counter high inflation with domestically manufactured products. All of this is opening room for innovation within one’s own borders.

Compared to the previous decades, the pace of innovation has improved significantly in the last decade. India, in particular, has a robust ecosystem for nurturing innovation. As countries look to become increasingly self-sufficient in terms of resources, innovation as a theme will be interesting to watch out for both in India and overseas.

Ways to tap into innovation as a theme
For a lay investor, keeping track of all the innovative practices across the companies in the listed universe is a challenging task. Hence, the best approach is to tap into a mutual fund based on this theme. Here, the fund manager will do the needful on your behalf and invest in a set of companies that are continuously engaging in and bringing forth innovative strategies and products. These companies can be domestic or international. By allowing for international exposure, the portfolio will have access to some of the cutting-edge innovative companies outside India.

Such a fund will typically have a bottom-up investment approach. While at it, such offerings’ investment style tends to be quality and growth-oriented. While picking stocks, the scheme, apart from being mindful of the valuation, will also look at parameters like companies with low debt, higher margins, and strong free cash flow generation. Given that the companies are innovative in nature, there can be a case for them trading at a premium. So, the portfolio may consist of companies at premium valuation with their revenue and profitability exhibiting above-average growth, given their tilt towards innovation. In terms of market capitalisation, such an offering will invest across various market capitalisations to tap into suitable opportunities.

Author:
By Ranjan Rakesh,Proprietor,Binduwasini Global