Invest with 5 to 7-year horizon to cope with economic cycles
Manufacturing has been in the limelight for some time due to the government’s attempts to foster rapid growth in this segment of the economy. Investors looking to benefit from the high expected growth may consider investing in manufacturing funds. While several funds belonging to this theme already exist, Tata Mutual Fund recently unveiled the new fund offer (NFO) of Tata Nifty 500 Multicap India Manufacturing 50:30:20 Index Fund. “The government has been a strong votary of domestic manufacturing. There is a concerted effort by policymakers to raise its share in India’s gross domestic product (GDP),” says Gaurav Misra, head-equity, Mirae Asset Investment Managers.
The push factors
Make in India and PM Gatishakti initiatives provided the foundation of the policy framework targeted at boosting manufacturing. Other key policy initiatives aimed at creating manufacturing capacities include production-linked incentive (PLI) schemes, export promotion, and liberal foreign direct investment (FDI) norms. The Atmanirbhar Bharat theme calls for import substitution.
With the China-plusone model gaining traction, many multinational companies now regard India as one of the go-to destinations. A considerable amount of investment is expected to flow into manufacturing owing to these initiatives.
“India PMI (index for manufacturing activity) recently hit a high of 57.2. Capacity utilisation in many sectors has gone past pre-covid levels, warranting capacity expansion. Most corporates have been doing private capex to expand and build for demand growth in the future,” says Anand Vardarajan, business head–institutional clients, banking, alternate investments & product strategy, Tata Asset Management.
Attracting fund houses
Several leading fund houses, like ICICI Prudential, Aditya Birla Sun Life, Axis, and so on offer manufacturing-focused funds, which invest a minimum 80 per cent of their corpus in stocks of companies engaged in manufacturing.
The Nifty India Manufacturing Total Return Index (TRI) is the benchmark for funds within this category. Auto and auto components, capital goods and healthcare are the top three sectors within this index. Allocation to these sectors is 31.1 per cent, 20.3 per cent and 15.1 per cent, respectively. Between its inception in August 2021 and March 2024, the index has given a compounded annual return of 15.6 per cent.
Risks exist
Like all thematic offerings, these funds carry concentration risk. “Investors could be exposed to volatility associated with the sectors the fund has invested in,” says Vardarajan.
Companies within the manufacturing sector are prone to cyclicality. “Macroeconomic factors like interest rates, inflation, and currency movements play a major role in its performance,” says S Sridharan, founder and chief executive officer (CEO), Wallet Wealth. Several funds focused on this theme have only a limited track record.
Who should invest?
Investors should begin constructing their portfolios using diversified equity funds. Only after constructing the core portfolio should they invest in a manufacturing fund. “This cannot be a fund for the firsttime investor. A seasoned investor with a high-risk appetite can consider these funds from a long-term perspective,” says Vardarajan.
“Investors who have sufficient knowledge of specific sectors and can accommodate certain aggressiveness in their portfolio can invest in these funds,” says Sridharan.
Take a long view
Investing in these funds with a longer horizon will allow investors to ride out economic cycles. “Keep tracking market movements and stay invested for the long term to mitigate associated risks. Also, avoid allocating more than 10 per cent of the portfolio to these funds,” says Sridharan.
The category has performed well in recent times.
“Nonetheless, one should invest in this theme with at least a fiveseven-year horizon. Any investor with a short-term orientation will need to get the entry and exit timing right,” says Misra.
This is something even professionals struggle to pull off consistently.