Manufacturing Mutual Funds Shine. Are they Worthy of Your Investment Portfolio?

May 06, 2024 / Reading Time: Approx. 8 mins

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Manufacturing Mutual Funds Shine. Are they Worthy of Your Investment Portfolio?

Mutual Fund houses in India are offering investors an opportunity to capitalise on India's dream of becoming the next 'factory of the world'.

And with India steadily climbing the ranks as a global manufacturing powerhouse, mutual funds focusing on the manufacturing segment have performed well. The Indian mutual fund industry currently houses nine schemes focusing on the manufacturing theme, with four of these having been launched in recent months. Of the nine schemes, three are passively managed schemes.

What are Manufacturing Mutual Funds?

Manufacturing mutual funds are thematic mutual funds. As per SEBI, thematic mutual funds need to invest a minimum of 80% of their total assets in equity and equity-related instruments of companies belonging to a particular theme. They have the flexibility to invest across the market cap range.

[Read: Should You Invest in Sectoral and Thematic Funds for High Returns?]

Why mutual funds are launching manufacturing-themed schemes?

The manufacturing sector holds immense potential as a catalyst for economic growth, social development, and job creation.

Currently contributing around 17% to the GDP, the manufacturing sector is expected to grow to 21% in the next 6-7 years, showcasing India's potential to strengthen its position in global supply chains.

The manufacturing purchasing managers' index (PMI) has been in the expansion zone for nearly three years now with a sharp uptick in new orders, including for exports. The future output index is also exhibiting strength. The capacity utilisation of the manufacturing sector too has been robust, staying above its long-term average.

Rising capacity utilisation
Manufacturing PMI in expansion zone
(Source: RBI Bulletin, April 2024)
 

India's growing focus on technology, innovation, and skilled labour is helping it emerge as a global manufacturing hub.

Additionally, the government's reform initiatives over the years, such as 'Make in India', have been instrumental in fostering a favourable business environment, encouraging investment, and promoting indigenous manufacturing. Streamlining of regulatory processes and the introduction of the Goods and Services Tax (GST) have contributed to the ease of doing business in the country. Furthermore, Production-Linked Incentives (PLIs) in diverse sectors such as auto, pharma, electronics, textiles, etc. are providing a substantial boost to the output.

A conscious effort by various multinational corporations to shift global supply chain management away from China is another key factor that is expected to boost domestic demand.

Accordingly, the Indian manufacturing sector is experiencing a surge in investments, marking a significant milestone in the nation's economic landscape. As per a report by Colliers, an investment management company, India's manufacturing market has the potential to reach USD 1 trillion milestone by 2025-26. Key industries such as chemicals, pharmaceuticals, electronics, automotive, industrial machinery, and textiles are expected to play a pivotal role in this.

How have Manufacturing-themed Mutual Funds performed?

Mutual funds focusing on the manufacturing theme have outperformed the Nifty 500 - TRI index as well as the Nifty500 Multicap 50:25:25 - TRI index by a remarkable margin across time frames.

When compared to the Nifty India Manufacturing - TRI index, ICICI Pru Manufacturing Fund has been a clear outperformer. Meanwhile, Aditya Birla SL Manufacturing Equity Fund trailed the Nifty India Manufacturing index across time frames, but has done well compared to the Nifty 500 index. Notably, among actively managed manufacturing funds, ICICI Pru Manufacturing Fund and Aditya Birla SL Manufacturing Equity Fund are the only schemes having a track record of more than five years.

Navi Nifty India Manufacturing Index Fund and Mirae Asset Nifty India Manufacturing ETF FoF being passively managed generated returns in line with the index.

How have Manufacturing Mutual Funds performed?

Scheme Name Absolute (%) CAGR (%)
6 Months 1 Year 2 Years 3 Years 5 Years
ICICI Pru Manufacturing Fund 38.79 66.29 36.15 32.21 26.26
Navi Nifty India Manufacturing Index Fund 36.36 55.42 -- -- --
Mirae Asset Nifty India Manufacturing ETF FoF 36.12 55.16 27.45 -- --
Aditya Birla SL Mfg. Equity Fund 30.25 51.88 24.28 19.25 18.97
Kotak Manufacture in India Fund 30.57 51.12 28.81 -- --
Quant Manufacturing Fund 39.54 -- -- -- --
NIFTY 500 - TRI 23.55 38.50 20.39 20.34 18.08
Nifty500 Multicap 50:25:25 - TRI 25.24 46.79 23.97 23.50 20.92
Nifty India Manufacturing - TRI 36.51 55.92 28.42 25.85 23.02
The securities quoted are for illustration only and are not recommendatory.
Past performance is not an indicator for future returns.
Returns are point-to-point and in %. Direct Plan-Growth option considered. Those depicted over 1-Yr are compounded annualised.
Data as of May 03, 2024
(Source: ACE MF, data collated by PersonalFN)
 

Meanwhile, Tata Nifty500 Multicap India Manufacturing 50:30:20 Index Fund, Axis India Manufacturing Fund, Canara Rob Manufacturing Fund, and HDFC Manufacturing Fund are the newly launched schemes focusing on the manufacturing theme and are yet to build a notable track record.

What are the top portfolio holdings of Manufacturing Mutual Funds?

Manufacturing funds invest predominantly in sectors such as Auto & Auto Ancillaries, Engineering, Construction, Healthcare, Metals, and Petroleum, etc. In terms of stocks, Reliance Industries, Maruti Suzuki India, Bharat Electronics, Mahindra & Mahindra, Sun Pharma, and Tata Steel, are among the preferred choices of these schemes.

 

Should you consider investing in Manufacturing Mutual Funds?

Manufacturing Mutual Funds offer investors an opportunity to benefit from companies that are at the forefront of driving the economic growth, consumption, and export demand. Over the years, the government's emphasis on making India self-reliant in manufacturing has resulted in better output and competitive advantage in a wide range of sectors. The segment is one of the key drivers of employment generation in India.

These funds can also offer exposure to emerging and niche segments within the manufacturing space that may have high growth prospects.

But while investing in the manufacturing sector presents a promising prospect, its cyclical nature and dependencies on factors such as government policies, global demand, technological advancements, availability of skilled labour, etc. means that the sector can go through unpredictable bouts of lean and growth phase.

It is important to note that government capital expenditure is expected to slow down in the coming fiscal years as it aims to reign in fiscal deficit. This can potentially drag the overall economic expansion unless private investment picks up.

Thus, thematic mutual funds, such as Manufacturing mutual funds, are only suitable for investors who understand the sector well enough and are ready to take tactical exposure to boost portfolio returns. One should have a high risk appetite and an investment horizon of at least 5-7 years when investing in thematic funds.

Various diversified equity mutual funds too offer exposure to stocks from the manufacturing sector. Thus, investors with moderate-to-high risk appetite too can benefit from India's manufacturing boom by selecting a suitable scheme.

[Read: Top 5 Mutual Funds That Are Betting on the Manufacturing Boom]

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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