Mutual funds bet big on manufacturing: Is it time to invest?

Sectoral and thematic funds received over  ₹19,000 crore in net inflows in May. (Image: Pixabay)
Sectoral and thematic funds received over 19,000 crore in net inflows in May. (Image: Pixabay)


  • Fund managers expect manufacturing as a theme to do well under Modi 3.0

MUMBAI : Sectoral and thematic funds received over 19,000 crore in net inflows in May, according to monthly data from the Association of Mutual Funds in India (Amfi). Nearly half of this amount went into HDFC Mutual Fund’s new fund offer (NFO) – HDFC Manufacturing Fund, which alone garnered 9,500 crore from investors.

It's not just HDFC MF riding this wave; other fund houses have also launched manufacturing funds recently. Baroda BNP Paribas MF introduced its manufacturing fund on June 10, while Mahindra Manulife MF launched its manufacturing fund at the end of last month. Additionally, Motilal Oswal MF and Invesco India MF have filed for manufacturing funds with the Securities and Exchange Board of India (Sebi).

Why the manufacturing theme?

Fund managers cite both global and domestic factors as drivers for the manufacturing sector in India. The push towards diversification from China as a manufacturing hub is creating opportunities for economies like India to fill the gap.

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“The global shift towards the China+1 sourcing strategy presents an opportunity for Indian manufacturers to be relevant in global manufacturing," says Krishna Sanghavi, chief investment officer of Mahindra Manulife MF.

"Manufacturing in India currently contributes only 17% to the country’s gross domestic product. With the government's continued focus on initiatives like 'Make in India' and 'Atmanirbhar Bharat,' along with the product-linked incentive (PLI) scheme, acting as a substantial booster, manufacturing is likely to benefit," he says.

The government's focus on increasing import substitution by boosting domestic manufacturing is also a significant factor. India’s non-oil and non-gems and jewellery imports were $422 billion in fiscal year 2024 (FY24).

(Graphics: Pranay Bhardwaj)
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(Graphics: Pranay Bhardwaj)

Sanghavi adds, "With a population of approximately 1.43 billion, India already has a large captive demand base across all product categories. Indian corporates are reasonably deleveraged and hence capable of scaling up by debt for capacity creation."

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“We see the manufacturing sector poised for multi-decade growth fuelled by growing consumption, investment, exports, changing geopolitics, and a favourable policy environment," says Suresh Soni, chief executive officer of Baroda BNP Paribas MF.

What should investors do?

There are currently only two manufacturing funds in the mutual fund industry with a five-year track record. ICICI Prudential Manufacturing Fund has delivered 28% annualized returns over the past five years, while Aditya Birla Sun Life Manufacturing Fund has provided 20% annualized returns in the same period. Comparatively, the market benchmark Nifty 50 Index has delivered about 15% annualized returns during this time.

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When considering theme- or sector-based investing, timing is crucial. Mutual fund experts advise that investments in such funds should not exceed 5-10% of your portfolio.

“Unlike other themes, manufacturing is not as concentrated. But at the same, your core allocation should remain in diversified equity funds – whether large-caps, flexi-caps, or multi-caps, depending on your risk appetite," says Nisreen Mamaji, founder of MoneyWorks FS.

“There is a push by the political leadership towards manufacturing and infrastructure development. But valuations of two-thirds of the sectors are trading at a premium to their historical average. So, investors need to be wary of that," points out Rushabh Desai, Founder of Rupee With Rushabh Investment Services.

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