Manufacturing funds are hot in markets, but beware of concentration risk

Investors with a long horizon and aggressive risk appetite may consider these funds

The manufacturing theme is currently favoured by investors, as is evident from the spate of new fund offers (NFOs). HDFC Mutual Fund’s recent NFO for its manufacturing fund raised Rs 9,563 crore, the third-highest collection ever for an NFO. NFOs by Baroda BNP Paribas and Mahindra Manulife Mutual Fund are on. Seven fund houses, with total assets under management of Rs 25,645.5 crore, already offer these funds.

Multiple tailwinds
 

As major economies aim to derisk their supply chains by adopting the China+1 strategy, India has an opportunity to emerge as a preferred manufacturing hub. 
 

The government has been focusing strongly on manufacturing. “It  aims to increase manufacturing’s contribution to GDP from 17 per cent to 25 per cent in the next three to four years, through initiatives like production linked incentives (PLIs) and Atmanirbhar Bharat, aimed at substituting imports and promoting exports,” says Renjith Sivaram, fund manager-equity, Mahindra Manulife Mutual Fund (MF). According to Jitendra Sriram, senior fund manager, Baroda BNP Paribas Mutual Fund, “Besides viability gap funding via PLI schemes, OSAT (outsourced semiconductor assembly and test) and DLI (design-linked incentives) are steps being taken to promote  manufacturing.” 

 

 

Sriram adds that the government has been investing in roads, railroads, airports and metro rail to reduce logistics costs and enhance manufacturing’s competitiveness. 
 

This theme could become a major wealth creator. “A growing working-age population, rising domestic demand, the right government policies, and strategic investments can help manufacturing reach its full potential,” says Lalit Kumar, fund manager, ICICI Prudential Manufacturing Fund. Sivaram points out that low corporate tax rates for new manufacturing units are in place. The shift from a majority to a coalition government may not have a significant impact. “Themes like power, railways, and defence are likely to remain strong regardless of government changes,” says Nitin Arora, fund manager, Axis Mutual Fund.

Key sub-themes 
 

Consumption: While the entry-level market’s growth remains uncertain, premiumisation is thriving. “The share of SUV sales has risen from 10-12 per cent to 50 per cent, with continued double-digit growth. In real estate, larger brands are selling more properties,” says Arora. 
 

Investment: Strong investment is getting reflected in capital goods companies’ earnings and order books. “Power deficits are increasing, necessitating investment in transmission, distribution, and generation. Power capex is part of a long cycle, spanning five to seven years,” says Arora. He adds that solar and wind are also seeing heavy capex.
 

Net exports: Post-PLI, India has emerged as a net exporter of mobile phones and integrated into Apple’s supply chain. Indian cable and wire companies are benefiting from renewed capex in the US.

Valuation concerns 
 

Valuations are currently high, with B2B businesses trading at B2C valuations due to scarcity premium (limited number of players) and strong growth. A manufacturing fund could struggle if the theme falls out of favour. “Like any other thematic fund, this, too, would face concentration risk,” says Abhishek Kumar, a Sebi-registered investment advisor and founder, SahajMoney.  
 

Should you invest?
 

Investors with a long horizon and aggressive risk appetite may consider them. “Those trying to use these funds for quick gains should avoid them due to risk of being late to the party,” says Kumar.