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Business News/ Mutual Funds / Your Questions Answered: I want to invest in emerging sectors. Please explain what are logistics mutual funds?
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Your Questions Answered: I want to invest in emerging sectors. Please explain what are logistics mutual funds?

Logistics mutual funds focus on the fast-growing logistics sector in India, offering benefits like professional management, diversification, convenience, and tax efficiency. However, risks include thematic, volatility, and selection risks due to sector-specific challenges.

Logistics mutual funds are thematic funds investing in the growing logistics sector in India.Premium
Logistics mutual funds are thematic funds investing in the growing logistics sector in India.

Q, I am running a small tyre dealership in my hometown. I have been investing in debt mutual funds and in sovereign gold bonds. I have now decided to take more risks and invest in emerging sectors of the Indian economy. Many of my acquaintances have suggested that I explore logistics mutual funds. Can you please explain what logistics mutual funds are and what are the pros and cons of investing in such mutual funds? 

Jeevan Ghorpode, Nashik, Maharashtra 

Before we understand what logistics mutual funds are, it is important to understand sectoral/thematic mutual funds since logistics mutual funds are a subcategory of sectoral/thematic mutual funds. Thematic/sectoral funds invest in stocks tied to a specific theme or a sector. These funds invest in companies and sectors united by a common idea or concept.

Examples of themes: 

Infrastructure theme: These funds might invest in companies related to infrastructure development, such as cement, power, and steel. 

Clean energy theme: Here, the focus would be on companies involved in renewable energy, electric vehicles, and sustainable practices.

Also Read: Your Questions Answered: I want to invest in sectoral funds. Please elaborate what are manufacturing mutual funds?

Logistics mutual fund

The logistics sector in India is one of the fastest-growing sectors in the economy. The sector is expected to reach a market size of USD 215 billion by 2025, driven by the increasing demand for e-commerce, infrastructure development, and government initiatives such as Make in India, Sagarmala, and Bharatmala. The logistics sector comprises various sub-sectors such as transportation, warehousing, freight forwarding, courier services, and cold chain. Investing in the logistics sector can offer multiple benefits to investors, such as:

One of the best ways to invest in the logistics sector is through a mutual fund that focuses on this theme. A logistics mutual fund is a thematic fund that invests predominantly in companies that are engaged in or benefit from the logistics sector. A logistics mutual fund can invest across market capitalisations, sectors, and geographies, depending on the fund manager's strategy and outlook.

Also Read: Sectoral, small-cap mutual funds witness highest inflow, shows AMFI January data

Advantages 

Some of the advantages of investing in a logistics mutual fund are:

Professional management: A logistics mutual fund is managed by a fund manager who has the expertise and experience in identifying and selecting the best stocks in the logistics sector. The fund manager also monitors the performance and risk of the portfolio and makes timely changes as per the market conditions and opportunities.

Diversification: A logistics mutual fund can invest in a basket of stocks that cover various segments and sub-segments of the logistics sector. This can reduce the concentration risk and provide exposure to different growth drivers and value propositions within the sector.

Convenience: A logistics mutual fund offers a hassle-free and cost-effective way of investing in the logistics sector. Investors can start investing with a small amount and benefit from the power of compounding over time. Investors can also avail of various facilities such as systematic investment plans (SIPs), systematic transfer plans (STPs), systematic withdrawal plans (SWPs), dividend reinvestment plans (DRIPs), etc.

Also Read: What are flexible STPs and how do they adapt to the changing market conditions?

Tax efficiency: A logistics mutual fund is taxed as an equity-oriented fund. This means that the long-term capital gains (LTCG) from the fund are taxed at 10% (plus surcharge and cess) if they exceed 1 lakh in a financial year. The short-term capital gains (STCG) are taxed at 15% (plus surcharge and cess). 

Disadvantages

Some of the challenges or risks of investing in a logistics mutual fund are:

Thematic risk: A logistics mutual fund is a thematic fund that invests in a specific sector or theme. This means that the fund's performance largely depends on how well the logistics sector performs. If the sector underperforms due to any reason, such as regulatory changes, competition, disruption, or macroeconomic factors, the fund may also suffer losses or deliver lower returns than other funds or benchmarks.

Volatility risk: A logistics mutual fund can be volatile due to the inherent nature of the sector. The logistics sector is sensitive to various factors such as fuel prices, interest rates, exchange rates, demand-supply dynamics, etc. These factors can cause fluctuations in the earnings and valuations of the companies in the sector. The fund may also face liquidity issues if there is low trading volume or high redemption pressure in some of the stocks.

Selection risk: A logistics mutual fund is subject to the risk of selecting wrong or underperforming stocks in the sector. The fund manager may make errors in judgement or analysis while choosing or exiting stocks. The fund may also miss out on some potential winners or hold on to some losers in the sector.

Limited choice: There are only five logistics mutual funds available in India as of now. These are UTI Transportation and Logistics Fund (launched in 2005), ICICI Prudential Transportation and Logistics Fund (launched in 2018), Bandhan Transportation & Logistics Fund (launched in 2019), Axis India Manufacturing Fund - Regular Plan (launched in 2021), and ICICI Prudential Innovation Fund (launched in 2021). 

These funds have different investment objectives, strategies, portfolios, performance records, expense ratios, etc. Therefore, investors should compare and analyse these funds carefully before choosing one or more for their portfolio.

In conclusion, investors who are interested in investing in a logistics mutual fund should consider their risk appetite, investment horizon, and financial goals before making a decision. They should also do their own research and analysis on the fund's performance, portfolio composition, expense ratio, exit load, etc. They should also compare different funds based on their returns, risk-adjusted ratios, peer rankings, etc.

A logistics mutual fund can be a smart investment option for Indian investors who want to tap into the growth potential of the logistics sector. However, investors should be aware of the risks and challenges involved and invest with a long-term perspective and a disciplined approach.

Disclaimer: Investing in mutual funds involves risks, including potential loss of principal. Please consult with a financial advisor before making any investment decisions.

Kuvera is a free direct mutual fund investing platform.

 

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Published: 18 Mar 2024, 12:58 PM IST
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