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Business News/ Mutual Funds / Your Questions Answered: I want to invest in sectoral funds. Please elaborate what are manufacturing mutual funds?
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Your Questions Answered: I want to invest in sectoral funds. Please elaborate what are manufacturing mutual funds?

Manufacturing mutual funds predominantly invest in companies in the manufacturing sector, offering exposure to economic growth and government initiatives. However, they carry market and sectoral risks, making them suitable for knowledgeable investors with a long-term horizon.

Manufacturing mutual funds focus on companies in the manufacturing sector.Premium
Manufacturing mutual funds focus on companies in the manufacturing sector.

Q. I am a private contractor, building apartments and villas in Ajmer. My wife is a homemaker, we have been investing in broad-based mutual funds tracking Nifty. I am now in a position to take more risk and invest in sectoral mutual funds. Many of my acquaintances have suggested that we should invest in manufacturing mutual funds. Can you please elaborate on what manufacturing mutual funds are and what are the pros and cons of investing in manufacturing mutual funds? 

Shyam Prakash Jain, Ajmer, Rajasthan

Before we understand what are manufacturing mutual funds we should first understand what are sectoral mutual funds. Sectoral mutual funds are a type of equity mutual fund that invests in a specific sector or industry of the economy, such as banking, technology, pharma, energy, etc. These funds aim to capitalise on the growth potential and opportunities of a particular sector by investing in the stocks of the companies belonging to that sector. 

According to SEBI guidelines, sectoral mutual funds have to invest at least 80% of their assets in equity and equity-related instruments of a particular sector. They can invest in companies of different sizes, from large-cap to mid-cap to small-cap, as long as they belong to the same sector. The remaining 20% of their assets can be invested in other sectors, debt instruments, money market instruments, etc.

What are manufacturing mutual funds? 

Manufacturing mutual funds are mutual funds that invest predominantly in companies engaged in the manufacturing sector. The manufacturing sector comprises industries that produce goods using raw materials, machinery, and labour. Some examples of manufacturing industries are automobiles, chemicals, textiles, metals, pharmaceuticals, and electronics.

Why invest in manufacturing mutual funds?

Manufacturing mutual funds can offer exposure to a diverse range of companies that benefit from the growth of the Indian economy, domestic consumption, and export demand. Manufacturing is one of the key drivers of economic development and employment generation in India.  

Manufacturing mutual funds can also provide an opportunity to participate in the government's initiatives to boost the manufacturing sector, such as Make in India, Production Linked Incentive (PLI) scheme, and Atmanirbhar Bharat. These initiatives aim to enhance the competitiveness, quality, and innovation of the Indian manufacturing sector and attract foreign investment.

What are the risks involved in manufacturing mutual funds?

Manufacturing mutual funds are subject to market risk, which means that the value of the fund's investments may fluctuate due to changes in market conditions, such as demand and supply, interest rates, currency movements, inflation, etc. Manufacturing funds are also subject to sectoral risk, which means that the fund's performance may be affected by factors specific to the manufacturing sector, such as regulatory changes, technological disruptions, environmental issues, labour disputes, etc.

Manufacturing funds are classified as thematic funds by SEBI, which means that they have a narrowly defined investment focus and may not be suitable for all investors. Thematic funds tend to have higher volatility and lower diversification than diversified equity funds. Therefore, investors should have advanced knowledge of macro trends and be ready for the possibility of moderate to high losses in their investments even though the overall market is performing better.

Pros of investing in manufacturing mutual funds

  • Exposure to a high-growth potential sector that can benefit from the government's initiatives such as Make in India, Production Linked Incentive scheme, etc. that aim to boost the manufacturing output and competitiveness of India.
  • Diversification across different sub-sectors within the manufacturing sector can have different growth drivers, demand cycles, and competitive advantages.
  • Potential to generate higher returns than the broader market indices in the long term, as the manufacturing sector can witness higher earnings growth, margin expansion, and valuation re-rating due to improved efficiency, innovation, and scale.
  • Opportunity to invest in emerging or niche segments within the manufacturing sector that can offer superior growth prospects and competitive edge over their peers.

Cons of investing in manufacturing mutual funds

  • Higher risk and volatility than diversified equity funds, as the performance of the manufacturing sector, depends on various factors such as economic growth, consumer demand, raw material prices, currency fluctuations, trade policies, etc. that can be unpredictable and cyclical.
  • Higher concentration risk, as the fund may have a large exposure to a few companies or sub-sectors within the manufacturing sector that can underperform due to company-specific or industry-specific issues.
  • Higher expense ratio than diversified equity funds, as the fund may incur higher research and management costs to identify and monitor the companies in the manufacturing sector.

How to choose a manufacturing mutual fund?

There are a few factors that investors can consider while choosing a manufacturing mutual fund, such as:

Fund house: Investors should choose a fund house that has a good track record, reputation, and experience in managing equity funds.

Fund manager: Investors should check the credentials, qualifications, and performance history of the fund manager who is responsible for selecting and managing the fund's portfolio.

Fund size: Investors should look at the fund size or assets under management (AUM) of the fund. A fund with a large AUM may indicate investor confidence and stability, but it may also face challenges in finding suitable investment opportunities and managing liquidity. A fund with a small AUM may offer higher growth potential and flexibility, but it may also have higher operational costs and volatility.

Expense ratio: Investors should compare the expense ratio or annual fees charged by different funds. A lower expense ratio can help in saving costs and enhancing returns over time.

Performance: Investors should evaluate the past performance of the fund across different time periods and market cycles. They should also compare the fund's performance with its benchmark index and peer funds to assess its relative performance.

Risk-return profile: Investors should understand the risk-return profile of the fund and see if it matches their risk appetite and return expectations. They should also look at the fund's portfolio composition, sector allocation, stock selection, and concentration to gauge its risk exposure.

In conclusion, manufacturing mutual funds can be a suitable investment option for investors who have advanced knowledge of macro trends and prefer to take selective bets for higher returns compared to other equity funds. However, these investors should also be ready for the possibility of moderate to high losses in their investments even though the overall market is performing better. Moreover, these investors should invest only through the SIP route and have a long-term horizon of at least five years to benefit from the growth potential of the manufacturing sector.

Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.

Kuvera is a free direct mutual fund investing platform.

 

 

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Published: 14 Mar 2024, 10:14 AM IST
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