Business Standard

Invest with 5 to 7-year horizon to cope with economic cycles

- SARBAJEET K SEN

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.

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