Why Invest in Innovative Businesses?

Historically, adoption of innovative strategies has proven to be transformative—driving societal progress and significantly boosting economic growth. The concept of innovation has become increasingly vital in today’s fast-moving, interconnected world. In the current dynamic environment, innovation is no longer optional—it’s the core driver of sustainable business success and long-term wealth creation.

Why Innovation is Important

Innovation has had a positive impact on economic growth. Countries that adopted innovative strategies in different sectors have witnessed a multiplier effect on their GDP growth in different periods. For example:

• The United States experienced a significant rise in GDP per capita growth, from just 1.5% in the 1960s–1970s to 3.0% in the 1980s–1990s, largely due to the adoption of information and communication technology (ICT).
• China saw exponential growth from below 2% in the early 1980s to over 8% in the 2000s, with innovation playing a key role.
• India, post-1990s reforms, began its journey of innovative reforms and witnessed improved economic growth over time.

Such trends highlight that nations embracing innovation in sectors like telecom, IT, electronics, and manufacturing have reaped large economic benefits.

Innovative Businesses Tend to Grow at a Much Faster Pace

The earnings per share (EPS) of the Magnificent 7 (a group of highly innovative companies) grew at a rate three times faster than the S&P 500 companies between 2004 and 2024. This clearly indicates how embracing innovation enables companies to scale faster and outperform traditional players.

Innovative Businesses Create Wealth Over the Long Term

Innovative business models have consistently outperformed traditional ones over the long term. For instance:

• The transition from fossil-fuel-powered cars to electric vehicles led Tesla to significantly outperform the Auto index by 2024.
• Increased use of online streaming platforms helped Netflix surpass traditional media and entertainment channels in market performance by 2024.

These examples underscore the long-term wealth creation potential of innovation-driven businesses.

Even in India, Sunrise Sectors Have Grown Disproportionately

India is no exception to this trend. Certain "sunrise sectors" have seen a disproportionate rise in weightage within indices, indicating investor preference and higher growth potential:

• The rise in weight of New Age sectors (such as IT, Pharma, and Financials) in the BSE 500 Index increased from about 10% in 2005 to over 50% in 2023.
• Similarly, in the Nifty 500 Index, the weight of new-age businesses also increased significantly, outperforming traditional industries.
• Multiple innovative Indian companies have outperformed the broader market indices, delivering higher returns for investors.

This shift highlights that innovation-focused businesses have become a core part of India’s growth story as well.

How to Participate in Innovative Businesses?

One can consider investing in HDFC Innovation Fund. The Fund aims to invest at least 80% of its net assets in equity and equity related instruments, which focuses on companies that are adopting innovative themes and strategies. The Fund has well defined methodology for selecting innovative companies and is a pure play on innovation theme.

Based on the methodology, the eligible universe would include following sectors:

• Consumer discretionary - which includes e-commerce and Auto & Ancilliaries
• Industrials- including capital goods, manufacturing and Defence
• Pharma and Healthcare
• Information technology and Chemicals

Conclusion :
Innovation is no longer just a buzzword it’s a core driver of business performance and investor returns. By investing in innovative businesses today, you position yourself to benefit from tomorrow’s growth leaders.

​The Scheme being thematic in nature carries higher risks versus diversified equity mutual funds on account of concentration and theme specific risks.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

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