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The auto sector, it seems, is on a roll now. Easing supply-side constraints, a pick-up in demand, and a fall in crude oil and metal prices— resulting in lower input costs—have all worked in auto manufacturers’ favour. It’s no wonder then that the Nifty Auto Index hit an all-time high a few days ago.

The index, after being an outperformer (over the Nifty 50) for more than half of the last decade, underperformed for almost four years since the beginning of 2018.

Auto sector in focus
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Auto sector in focus

Since bottoming out in March 2020, the index has witnessed a growth of 177% so far. To put this in perspective, during the same period, the Nifty 50 and the Nifty 500— representing broader market indices—went up by 102% and 111%, respectively.

Experts, and recent research reports, have painted a positive outlook for the sector in the near future as well.

Despite the recent buoyancy, “the underperformance in the last five-year period is stark – while the auto index is up just 13% in absolute terms, the Nifty 50 index has returned about 62%," said Vineet Bagri, managing partner- TrustPlutus Wealth.

Even on the valuation front, the auto sector looks reasonable. “On a one-year forward basis, the Nifty Auto index is largely trading in line with its 3-year historical average," said Saji John, senior research analyst at Geojit financial services.

However, the outlook is not devoid of any risks. A recent report from Emkay Research on the sector stated their positive view on the sector—underpinned by expectations of a cyclical upturn over the next three years—along with key downside risks. “It includes the continuation of supply issues, weak global/domestic macros, further increase in commodity prices and adverse currency movements."

A savvy investor with a high-risk appetite can consider taking exposure to the sector, according to experts.

“An aggressive investor who has the ability to time the exit well can consider having a tactical allocation to the sector and that too, not more than 5-10% of the portfolio," said Vishal Dhawan, founder & CEO of Plan Ahead Wealth Advisors.

Tactical or strategic allocations involves taking active entry and exit calls based on prevalent market conditions to improve the risk-adjusted returns of the overall portfolio.

There are three funds focused on the automobile sector in India—Auto ETFs from Nippon India and ICICI Pru Mutual Fund—replicating/ tracking the Nifty Auto Index. These two ETFs were launched in the beginning of calendar year 2022.

There’s also an actively managed sectoral fund—UTI Transportation & Logistics Fund—with meaningful exposure to the automobiles and auto components sector (77%, as on 30 June 2022).

Despite the recent uptick witnessed by the sector, experts would ask you to stay from it if you think you cannot time the exit well and cannot withstand the volatility that comes with sectoral funds. “Timing the exit is where the challenge comes with investing in sectoral funds and many retail investors will not be able to do that," added Dhawan.

Agreeing with this, Santosh Joseph, founder and managing partner, Germinate Investor Services, LLP, said, “auto sector is very cyclical. Instead of taking a call on the sector and later timing the exit, retail investors will be better off investing in a diversified mutual fund, where the fund manager decides if they have to go overweight or underweight on the sector."

Also, tactical calls don’t matter much for small investors with a few lakhs of rupees for investments, believes Joseph. “Even if the call works with superior returns, the tactical allocation, which accounts for only a small portion of one’s portfolio, may not add anything significant to overall returns," he added.

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