Car sales rebounding. Should you invest in transport sector mutual funds?
4 min read 16 Oct 2022, 06:41 PM ISTThematic investing results into higher returns in some of the years and may give sub optimal returns during other years when the theme is not playing out in the market. So you should invest in such thematic funds if you have higher risk appetite
PremiumTransportation and logistics are growth engine of any economy. Investing in these sectors may get you better returns if you invest in it at the right time. What encompasses transportation and logistics sectors and whether you should invest in this sector, let us discuss.
What is covered under transportation?
First let us discuss transportation Sector. It comprises of manufacturers of all vehicles whether two wheelers, three wheelers, tractors, passenger vehicles and commercial vehicles. It also includes all their suppliers.
On the face of it, a car looks a single product but do you know that a single car has about 30,000 parts counting every part down to the smallest screws, nuts, and bolts. Some of these parts are made by the manufacturer themselves but there are lots of other parts for which the industry depends on suppliers that make many of these parts. The 30,000 or so parts use different raw materials and different manufacturing processes.
So all the manufacturer of automobiles and those supplying their parts constitute transportation sector.
What is covered under logistics?
New logistics policy unveiled by the government has brought the logistics sector in limelight. It includes all the industries which bring the goods from a manufacturer to its final consumer. So the entire supply chain, rail, shipping companies, delivery and courier companies are part of logistics sector.
Should you invest in these funds?
Sales of passenger vehicles is recording unprecedented growth in recent months. There are various reasons which have kept the demand for vehicles growing over the years.
Owning a vehicle which was considered as luxury in good old days has now become bare necessity for commuting in cities and towns especially smaller places where public transportation system is not robust. The demand is further fueled by increase in population, migration and rapid urbanization. The increased consumerism has is another reasons for increased demand of two wheelers and three wheelers.
The Demand has been further helped by easy availability of finance to buy a vehicle as well as increased capacity to service the loan due to increase in disposable income specially in the millennials. As India moves from being a developing country to a developed country the per capita owning of vehicle will catch up sooner than later.
Moreover, the promotion of electric vehicle to reduce dependence on fossil fuel will bring about huge change and demand for electric automobiles and auto ancillary products.
Logistics sectors is also gaining importance of late due to people moving from brick and mortar mode of buying to online shopping. The improvement in communication facilities specially expansion of internet facility has opened many vistas for e-commerce. Flourishing of e-commerce is a major booster to the logistics sector. This sector is moving from a predominantly an organized sector to being organized with listing of more logistic companies. This offers more investing opportunities. The New Logistics Policy (NLP) announced by the government recently highlights the importance of this sector and government’s support to this sector. With increased infrastructure for logistics sectors under the NLP the cost of logistic companies will come down in future thus adding to their profitability.
Transportation and logistics sectors will perform well in the future due to multi-year growth opportunity in the mobility services sector.
Investment opportunities available
Since you can not invest do adequate research to find out the companies which have potentials in these sectors, you can invest in them through mutual fund schemes. UTI transport and logistics Fund has been in existence for more than 15 years which was launched on Aug 01, 2005. Joining the same sphere are IDFC Transportation and Logistics Fund and ICICI Prudential Transportation and Logistics Fund which are currently open. The UTI transportation and logistics fund has performed well in the past. It has returned around 15% on annual basis since its inception in spite of there being lull period in between for personal car segment in between.
Risk associated with investing in thematic funds
Investing in transportation and logistics sector is thematic in nature and thus it carries with it the higher risk associated with investing in thematic funds. Thematic investing results into higher returns in some of the years and may give sub optimal returns during other years when the theme is not playing out in the market. So you should invest in such thematic funds if you have higher risk appetite. Since this is long term theme product those who have time horizon of at least 5 years only should invest in it.
Tax treatment of profits on this fund
These funds invest predominantly in Indian equities they qualify as equity oriented schemes under tax laws and any profits made for investments held for 12 months or beyond are treated as long term capital gains and taxed at flat rate of 10% after initial tax free gain of one lakh. The profits realised on investments held for less than 12 months are treated as short term capital gains and taxed at flat rate of 15%.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.
