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What are Auto Mutual Funds in India?

Auto sector mutual funds are thematic mutual funds that invest across automobile manufacturers (2, 3 and 4 wheelers) auto ancillaries. There are currently two Auto ETF schemes and one transportation and logistics mutual fund in India. The auto ETF schemes track the performance of the automobile sector. The benchmark for the auto ETF schemes is the Nifty Auto Index.

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On the other hand, the transportation and logistics fund has a more diversified investment strategy. In addition to the automobile manufacturers and ancillaries, it invests in auto OEMs, courier and logistics, railway, ports/ shipping/ shipyards, tyres and airports/ airlines.
Auto ETFs aim to closely track the index with minimum tracking error. While the transportation and logistics fund invests a minimum of 80% of its assets in the transportation and logistics sector.
The auto sector mutual funds are open-ended equity schemes and therefore are suitable long term investment options. The funds can be highly volatile in the short term. Therefore, investors who have an in-depth understanding of the sector and can track it closely can consider investing in the schemes. Since these are high-risk funds, you need to have good risk tolerance levels and a long-term investment horizon. 

Auto Sector Outlook in India

As of 2020, India was the fifth-largest auto market. By 2026, India aims to be the third-largest automotive market in the world by volume. India is the world’s largest tractor manufacturer. Second-largest bus maker, and third-largest heavy truck manufacturer. Thus, putting it in a strong position in the international heavy vehicle market.

Two-wheelers dominate the Indian markets as the population is largely middle class and youngsters. Furthermore, the increased interest of businesses in expanding to the rural markets boosted the sector’s expansion.
Also, India is a major auto exporter with excellent export growth prospects.
Over the last few years, the Indian auto-components business has seen steady expansion. By FY26, the industry is estimated to be worth USD 300 billion.
The auto-components sector contributes 2.3% to India’s GDP and employs more than 1.5 million people directly and indirectly. By 2026, the automobile component industry expects to contribute about 5-7% to India’s GDP. A stable government framework, higher purchasing power, a big domestic market, and ongoing infrastructural development have made India a desirable investment location.
The industry can be divided into two categories: organized and unorganized. The organized sector caters to original equipment manufacturers (OEMs) and consists of high-value precision instruments. On the other hand, the unorganized sector consists of low-value items and mostly serves the aftermarket.
The Indian auto component sector is expected to rise by 20-23% in FY22. The sector growth is due to strong overseas demand and increasing demand for local original equipment and aftermarket markets. By 2026, the government aims to export auto components worth USD 30 billion.
100% FDI allowed under automatic route for automobile and auto components.
As part of the Automotive Mission Plan (2016-26), India forecasts to be one of the top 3 automotive industries in the world by 2026.

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Growth Drivers

Source: MakeinIndia

  • Growing Income: In India, the average household income has witnessed a 3X increase. Growing income and higher disposable income is favourablefor the sector.  
  • Young Population: By 2025, India will have the youngest population in the world, with an average age of 25 years. The younger nation will be a good market for the automobile sector.
  • Vehicle Penetration: India foresees higher vehicle penetration by 2025 and it estimates to reach 72 vehicles per 1000 people. Furthermore, the increased interest of businesses in expanding to the rural markets boosts the sector’s expansion.
  • Electric Vehicles: India is quickly becoming the world’s largest EV market for electric two-wheelers, three-wheelers, and automobiles. The GOI is offering good financial assistance to auto component makers and electric vehicle manufacturers.
  • Research and Development: India aims to become the global manufacturing and research and development (R&D) hub. India spends approximately 40% of the global engineering and R&D budget of USD 31 billion. Furthermore, the automotive industry accounts for 8% of the country’s R&D spending.
  • Global Sourcing Hub: India is establishing itself as a worldwide sourcing centre for automotive components. Closer proximity to the global markets such as ASEAN, Europe, Japan and Korea is a huge opportunity for Indian manufacturers. The increasing number of global OEMs procuring from India is transforming the country into a favourable design and manufacturing base.
  • Cost Competitive: In comparison to Europe and Latin America, India is more cost-effective (10-25%). As a result, India is cost-competitive with other manufacturing nations. Furthermore, lower excise duty on vehicles will boost demand.
  • Atmanirbhar Bharat Abhiyaan: A special economic and comprehensive package worth INR 20 lakh crores is set to promote manufacturing in India. Atmanirbhar Bharat 3.0 introduces PLI initiatives in the automobile and auto component sectors worth INR 25,938 crores.

Advantages of Investing in Auto Mutual Funds

  • Good Potential: Certain sectors thrive better than others due to favorable government policies and incentives in place at the moment. Furthermore, a high internal and global demand for their products/services aids the sector’s performance. Being a strategic investor, you can invest in the sector and benefit from its growth. As a result, auto sector funds are thought to have a high growth potential while posing a high risk.
  • Long Term Capital Appreciation: Auto funds identify long-term growth potential companies. Auto funds invest in companies with strong financials. However, owing to the marketing volatility, the funds take concentrated exposure to certain stocks. The sector has a good potential to generate significant returns in the long term.
  • Capitalize on Opportunities: The electronic vehicles segment is quite nascent and has very good growth potential. The auto sector funds will give you exposure to such stocks. Thus, creating an opportunity to earn significant returns.
  • Professional Management: If you are interested in investing in the auto sector, it can often be difficult to identify stocks and invest in them. Auto sector mutual funds are a good alternative. Since the fund manager focuses on selecting auto stocks, you can leverage their expertise and invest in the fund.

Who Should Invest in Auto Mutual Funds?

Consider investing in auto funds if you wish to seek exposure to the automobile and auto ancillary sector. Auto mutual funds are suitable for investors looking for tactical allocation. These funds add good diversification to the investment portfolio. If you wish to add some electronic vehicle companies, auto sector funds seem to be a good fit.

Auto mutual funds are equity schemes. Therefore, it goes without saying a long-term investment horizon is a must. These thematic funds follow a particular theme and are focused and, hence, highly volatile in the short term. Though the funds invest in high-quality stocks, the markets are volatile. And the theme will be highly sensitive to the movements. Thus, invest only if you are comfortable with the risk levels. Furthermore, since auto funds focus on one single theme, exposure of more than 10% to your portfolio is not advisable.

Things to Know before Investing in Auto Mutual Funds

The auto sector is in focus, and the opportunities are bright; however, you should be careful while choosing a scheme to invest in. Following are some parameters that will help you select the best auto mutual fund for investment:

  1. Auto Sector Outlook: The automobile industry benefits from a variety of variables, including low-cost trained labour, strong R&D centres, and low-cost production. The industry also offers excellent investment prospects employment opportunities – direct and indirect employment to skilled and unskilled workers. The transportation sector is seeing new opportunities amid globalization.
    In particular, the transition to electric, electronic, and hybrid cars, is seen as more efficient, safe, and reliable modes of transportation. This will create new verticals and opportunities for auto-component producers over the next decade. Indian auto-component manufacturers are well-positioned to benefit from the sector’s globalization, as export potential appears to be promising.
  2. Historical Performance: The historical performance of an auto fund doesn’t guarantee future returns. However, analyzing the auto fund’s returns against its benchmark and peers will help you understand its performance. Always choose funds that have consistently outperformed their benchmark and peers. By analyzing the historical performance, you can understand the performance of the fund over different market cycles.
  3. Investment Objective: Auto mutual funds focus on taking advantage of the automobile and auto component sector’s long-term growth potential to build long-term wealth. The fund manager handpicks the auto sector stocks on the basis of the company’s track record, management, growth prospects, and overall industry situation. Furthermore, the fund manager aims to maintain the portfolio diversified within the automobile and auto components sector to ensure minimum risk.
  4. Investment Horizon: Auto mutual funds are equity schemes and therefore require a long-term investment duration to generate significant returns. Auto schemes can be highly volatile in the short term. Consider investing in an auto fund only if you have a long-term investment horizon, and understand the sector well.
  5. Suitability: Auto mutual funds are ideal for aggressive investors who seek auto sector exposure to their portfolios. These funds offer good diversification to the portfolio. However, a long-term investment horizon is necessary to overcome the volatility. Therefore, assess the suitability of the auto sector theme and the funds to your investment portfolio, goals and horizon.
  6. Asset Allocation: It is always wise to have a well-diversified investment portfolio. The volatility of the market smoothens out with a well-diversified portfolio. Because auto sector funds follow a theme, the number of stocks available is limited. However, the fund manager has the liberty to explore stocks across market capitalization. This gives an advantage of investing in value companies. Therefore, look for auto funds with a well-diversified asset allocation.

Even though the auto theme has good future prospects, its growth may not be permanent. Auto funds are highly susceptible to market pressures. Therefore, if you are an investor who understands the auto theme in-depth and is willing to undertake the volatility, you can consider investing in auto mutual funds.