India’s Manufacturing Momentum: ICICI Pru Manufacturing Fund vs. Kotak Manufacture in India Fund
July 15, 2024 Mutual Fund
The Indian manufacturing sector is a crucial pillar of the country’s economic growth. The manufacturing sector contributes around 16-17% to the GDP and employs around 12% of the workforce. With the government’s ambition to increase this contribution to 25% by 2025, the sector is poised for significant transformation and growth.
Post-independence, India adopted a mixed economy model with a significant focus on the public sector. However, the economic reforms of 1991 marked a shift towards liberalization, privatization, and globalization, leading to increased private sector participation and foreign investments. This transformation laid the foundation for the modern Indian manufacturing landscape.
The Indian manufacturing sector is steadily moving toward more automated and process-driven manufacturing, which is projected to improve efficiency and enhance productivity. India has the capacity to export goods worth USD 1 trillion by 2030 and is on the road to becoming a major global manufacturing hub.
[Read: Manufacturing Mutual Funds Shine. Are they Worthy of Your Investment Portfolio?]
India now has the physical and digital infrastructure to raise the share of the manufacturing sector in the economy and make a realistic bid to be an important player in global supply chains.
India is gradually progressing on the road to Industry 4.0 through the Government of India’s initiatives like the National Manufacturing Policy and the PLI scheme for manufacturing which was launched in 2022 to develop the core manufacturing sector at par with global manufacturing standards.
A crucial indicator that signals the economic health of the manufacturing sector, is the Manufacturing Purchasing Managers’ Index (PMI). It is derived from monthly surveys of industry managers across various sectors and reflects the business conditions, including new orders, inventory levels, production, supplier deliveries, and employment environment.
India’s Manufacturing PMI denotes expansion phase
(Source: RBI Bulletin – June 2024)
A PMI above 50 indicates expansion, while below 50 signifies contraction. India’s manufacturing sector activity continued to expand in November 2023, with the S&P Global Purchasing Managers’ Index (PMI) reaching 56.
In February 2024, the Manufacturing PMI for India stood at 56.9, indicating robust expansion in the manufacturing sector. This reading reflects sustained growth momentum and positive business conditions. Let’s delve into the factors contributing to this strong performance and its implications.
The Indian manufacturing sector is currently buoyed by several favourable trends:
- Domestic Market Growth: A burgeoning middle class and increasing disposable incomes drive domestic consumption of manufactured goods.
- Export Growth: Indian manufacturers are expanding their global footprint, with competitive pricing and improved quality standards.
- Technological Integration: Adoption of Industry 4.0 technologies, such as automation, IoT, and AI, enhances productivity and operational efficiency.
- Policy Support: Government initiatives like ‘Make in India’, PLI schemes and infrastructure development are creating a conducive environment for manufacturing growth.
- Green Manufacturing: Incentives for adopting sustainable practices, renewable energy use, and reducing carbon footprints, aligning with global environmental standards.
In India, the market for grain-oriented electrical steel sheet manufacturing is witnessing high demand from power transformer producers, due to the rising demand for electric power and increasing adoption of renewable energy in the country.
[Read: Top 5 Mutual Funds That Are Betting on the Manufacturing Boom]
Investors seeking to capitalize on this growth of the manufacturing sector may consider thematic funds dedicated to manufacturing companies. Two such prominent options are ICICI Pru Manufacturing Fund and Kotak Manufacture in India Fund.
This article provides an in-depth comparison of these two funds, analysing their investment strategies, performance, risk factors, and suitability for different types of investors, to aid you in making an informed investment decision.
# – ICICI Prudential Manufacturing Fund
ICICI Prudential Manufacturing Fund is an open-ended equity scheme that belongs to ICICI Mutual Fund. It is a well-established sectoral fund launched in October 2018 and currently has an AUM of Rs 5,959.57 crore (as of June 30, 2024).
The ICICI Prudential Manufacturing Fund seeks to generate long-term capital appreciation by predominantly investing in equity and equity-related securities of companies engaged in manufacturing and related sectors.
# – Kotak Manufacture in India Fund
Kotak Manufacture in India Fund is an open-ended equity scheme and belongs to Kotak Mahindra Mutual Fund. Launched in February 2022, it is a popular sectoral scheme that emphasizes the Indian manufacturing segment and currently holds an AUM of Rs 2,339.43 crore.
Kotak Manufacture in India Fund aims to provide long-term capital appreciation by investing in a diversified portfolio of companies that are likely to benefit from the government’s ‘Make in India’ initiative. The fund emphasizes companies involved in manufacturing activities within India, targeting sectors that are expected to witness significant growth and development.
Investment Style and Philosophy:
– ICICI Prudential Manufacturing Fund: follows an active investment strategy, where the fund manager identifies companies with strong growth potential within the manufacturing space. The scheme endeavours to capture the growth potential of the manufacturing sector, which is poised for expansion due to various government initiatives, infrastructure development, and increasing domestic consumption.
– The portfolio focuses on companies across different market capitalizations within the manufacturing sector. Bottom-up stock selection based on fundamental analysis. Diversified exposure to various sub-sectors such as automobiles, industrials, chemicals, and consumer goods.
– Kotak Manufacture in India Fund: invests in companies across the manufacturing spectrum. However, the fund manager might have a different investment philosophy and stock selection criteria compared to ICICI Pru’s offering. The portfolio of the ICICI Prudential Manufacturing Fund is diversified across various sub-sectors within the manufacturing domain.
– The scheme endeavours to concentrate on companies that align with the ‘Make in India’ vision and preference for sectors such as capital goods, consumer durables, pharmaceuticals, and infrastructure. The scheme will be actively managed to identify and invest in high-growth potential stocks.
Both ICICI Prudential Manufacturing Fund and Kotak Manufacture in India Fund aim to generate long-term capital appreciation by investing in a diversified basket of manufacturing stocks. However, they exhibit some key differences in their investment philosophies.
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Performance Comparison: Rolling Returns
Scheme Name Absolute (%) CAGR (%) 6 Months 1 Year 3 Years 5 Years ICICI Prudential Manufacturing Fund(G)-Direct Plan 28.48 48.59 31.97 24.47 Kotak Manufacture in India Fund(G)-Direct Plan 21.80 35.01 – – Manufacturing – Category Average 24.19 51.49 22.35 23.53 Benchmark – Nifty India Manufacturing – TRI 23.20 34.88 – – Data as of July 11, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)The ICICI Prudential Manufacturing Fund has shown impressive market performance over various timeframes. This remarkable performance highlights the fund's ability to capitalize on the growth opportunities in the manufacturing sector effectively.
Looking at the longer-term performance, the ICICI Prudential Manufacturing Fund maintained strong returns. The fund's diversified portfolio and effective stock selection strategy have been pivotal in achieving these results. However, it's crucial to remember past performance is not a guarantee of future results.
The Kotak Manufacture in India Fund, although newer compared to the ICICI Prudential Manufacturing Fund, has also demonstrated commendable performance. Over the last 6 months, the fund posted an absolute return of 21.80%, which, while slightly lower than the ICICI fund, still reflects strong performance against the benchmark and category average.
However, the short-term performance indicates that the Kotak Manufacture in India Fund is well-positioned to benefit from the growth in the manufacturing sector, driven by the 'Make in India' initiative. The fund's strategy of focusing on companies aligned with this initiative has shown promise, contributing to its positive returns within the available timeframe.
Overall, given the long-term positive track record, the ICICI Pru Manufacturing Fund appears to be an attractive option as compared to the ICICI Prudential Manufacturing Fund for investors seeking significant gains from the growth potential of the manufacturing sector.
The fortunes of these funds are heavily tied to the performance of the Manufacturing sector. Any headwinds faced by the sector can significantly impact their NAV. Moreover, past performance should not be the only element, it's important to note that one may consider other factors like portfolio holdings, risk profile, and investment philosophy before making a decision.
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Portfolio Composition: Asset Allocation of Schemes
Both ICICI Prudential Manufacturing Fund and Kotak Manufacture in India Fund are popular choices for investments in manufacturing sector-oriented funds, but their asset allocation strategies differ slightly.
Scheme Name Large Cap % Mid Cap % Small Cap % Kotak Manufacture in India Fund 57.93 26.55 13.88 ICICI Prudential Manufacturing Fund 52.72 22.84 18.99 Data as of July 11, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)Both Kotak Manufacture in India Fund and ICICI Prudential Manufacturing Fund focus on investing in manufacturing companies, but their approach to diversification within that sector differs.
The Kotak Manufacture in India Fund exhibits a strong preference for large-cap stocks, which constitute 57.93% of its portfolio. Large-cap stocks are typically more stable and less volatile compared to mid-cap and small-cap stocks, providing a solid foundation for the fund.
This substantial allocation to large-cap stocks indicates a conservative approach aimed at ensuring stability and steady growth, leveraging the robust performance and established market presence of large-cap companies.
Mid-cap stocks make up 26.55% of the Kotak Manufacture in India Fund's portfolio. These stocks strike a balance between the growth potential of small caps and the stability of large caps. The fund's allocation to small-cap stocks stands at 13.88%, reflecting a selective approach towards high-growth potential but riskier investments. Small-cap stocks, though more volatile, can provide substantial returns, especially in a growing economy.
ICICI Prudential Manufacturing Fund has a slightly lower allocation to large-cap companies (52.72%) compared to Kotak Manufacture in India Fund. It allocates a bit more to mid-cap companies (22.84%) and has a higher allocation to small-cap companies (18.99%).
This higher allocation reflects a more aggressive approach, aiming to tap into the substantial growth potential of mid and small-cap companies in the manufacturing sector. The increased exposure to small caps indicates a willingness to accept higher volatility for the possibility of higher returns.
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Market Volatility: Risk profile of Schemes
Investing in sectoral funds may offer benefits from the growth potential of the underlying sector like – Manufacturing, however, understanding the scheme's risk-reward profiles is crucial before investing.
Risk Ratio Kotak Manufacture in India Fund ICICI Prudential Manufacturing Fund Standard Deviation (3 Year) 12.72 14.39 Sharpe 0.54 0.49 Sortino 1.31 1.08 Data as of July 11, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)An investment with high volatility is considered riskier than an investment with low volatility; the higher the Standard Deviation, the higher the risk. In this case, the Kotak Manufacture in India Fund has a lower Standard Deviation (12.72) compared to the ICICI Prudential Manufacturing Fund (14.39).
This suggests that the Kotak fund experiences less fluctuation in its returns, making it relatively less volatile. Investors who are risk-averse and prefer more stable returns might find the Kotak fund more appealing due to its lower volatility.
In terms of risk-adjusted returns, both funds have Sharpe Ratios below 1, which suggests some risk-adjusted returns. Here, the Kotak Manufacture in India Fund has a higher Sharpe Ratio (0.54) compared to the ICICI Prudential Manufacturing Fund (0.49). This implies that Kotak's Manufacturing fund has provided higher returns per unit of risk taken compared to ICICI's Manufacturing fund.
However, the Sortino Ratios paint a slightly different picture. The Kotak Manufacture in India Fund has a Sortino Ratio of 1.31, while the ICICI Prudential Manufacturing Fund has a Sortino Ratio of 1.08. This suggests that the Kotak fund is better at protecting against downside risk compared to the ICICI fund, making it more attractive to investors who prioritize minimizing losses during market downturns.
Remember, this comparison is just to give you an idea about the risk profile of the two best manufacturing mutual funds. Consider your risk tolerance and investment goals to determine which fund aligns better with your investment strategy.
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Top Holdings of the Schemes:
While both ICICI Prudential Manufacturing Fund and Kotak Manufacture in India Fund invest in the manufacturing sector, their specific holdings and sector allocation reveal some key differences:
ICICI Prudential Manufacturing Fund Kotak Manufacture in India Fund Company % Assets Company % Assets Ultratech Cement Ltd. 6.92 Reliance Industries Ltd. 5.02 Maruti Suzuki India Ltd. 4.53 Tata Steel Ltd. 4.09 Sun Pharmaceutical Industries Ltd. 4.19 Sun Pharmaceutical Industries Ltd. 3.90 Larsen & Toubro Ltd. 4.16 Hero MotoCorp Ltd. 3.22 Cummins India Ltd. 4.01 Hindalco Industries Ltd. 2.96 Hindustan Aeronautics Ltd. 3.97 Ambuja Cements Ltd. 2.87 JSW Steel Ltd. 3.70 Tata Motors Ltd. 2.86 Reliance Industries Ltd. 3.52 ABB India Ltd. 2.81 Siemens Ltd. 3.11 Bharat Electronics Ltd. 2.65 Hero MotoCorp Ltd. 2.94 Dr Reddy's Laboratories Ltd. 2.60 Data as of July 11, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)Both ICICI Prudential Manufacturing Fund and Kotak Manufacture in India Fund focus on investing in leading companies across the manufacturing sector.
The ICICI Prudential Manufacturing Fund has a diversified portfolio focusing on various sub-sectors within the manufacturing domain. Its top holdings reflect this strategy, with a mix of companies involved in construction, automotive, pharmaceuticals, industrial machinery, and defence.
The fund leans towards capital goods and automobile companies within the manufacturing sector. Ultratech Cement (6.92%) is its top holding, followed by Maruti Suzuki India (4.53%) and Larsen & Toubro (4.16%). This indicates a significant focus on heavy industries. Interestingly, it also holds pharmaceutical giants like Sun Pharma (4.19%) and Reliance Industries (3.52%), diversifying its exposure beyond core manufacturing.
The Kotak Manufacture in India Fund emphasizes companies that align with the 'Make in India' initiative, targeting sectors expected to benefit from government policies and industrial growth. Its top holdings reflect a strategic focus on heavy industries, automotive, pharmaceuticals, and electronics.
While Kotak's fund also invests in capital goods with Larsen & Toubro (2.81%) and ABB India (2.81%) featuring in the top holdings, its sector allocation seems more balanced. Reliance Industries (5.02%) takes the top spot, potentially offering exposure to petrochemicals and refining alongside manufacturing.
Notably, both funds share holdings in Sun Pharma, suggesting a shared belief in the pharmaceutical sector's potential.
This subtle difference in sector focus within the manufacturing space could influence the funds' performance based on how those specific sectors perform.
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Expense Ratio of the Schemes
When comparing thematic funds, the Expense Ratio, which represents the annual fee charged, plays a crucial role in determining your returns. Here's a quick breakdown of ICICI Prudential Manufacturing Fund vs Kotak Manufacture in India Fund:
Scheme Name Direct Plan Expense Ratio Regular Plan Expense Ratio ICICI Prudential Manufacturing Fund 0.73% 1.88% Kotak Manufacture in India Fund 0.49% 1.97% Data as of July 11, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)As you can see, Kotak Manufacture in India Fund has a significantly lower expense ratio for direct plans as compared to ICICI Pru Manufacturing Fund. Do note even a small percentage point difference in expense ratio may accumulate over time and impact your returns.
ICICI Prudential Manufacturing Fund's higher expense ratio could have an impact on the investor's actual returns and thus, many may find Kotak's Fund as a cost-effective option. However, on the contrary under the regular plan, Kotak has a slightly higher expense ratio as compared to ICICI's Fund.
Remember, a lower expense ratio translates to potentially higher returns over time, but a lower expense ratio should not be the only factor to be considered while investing in sectoral funds.
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Suitability of Investors to the Schemes:
ICICI Prudential Manufacturing Fund is well-suited for long-term investors who seek capital appreciation over five years or more. This fund appeals to those with a moderate to high-risk tolerance, as it is exposed to the inherent volatility of the manufacturing sector.
Investors who have a keen interest in the broader manufacturing industry and wish to benefit from its diversified sub-sectors, such as automobiles, industrials, chemicals, and consumer goods, will find this fund attractive. Its balanced approach between large-cap, mid-cap and small-cap stocks offers a mix of stability and growth potential, making it a suitable option for investors looking for diversified manufacturing exposure.
Kotak Manufacture in India Fund Investors who have a keen interest in the broader manufacturing industry and wish to benefit from its diversified sub-sectors, such as automobiles, industrials, chemicals, and consumer goods, will find this fund attractive. Its balanced approach between large-cap and mid-cap stocks offers a mix of stability and growth potential, making it a suitable option for investors looking for diversified manufacturing exposure.
Investors who are optimistic about the prospects of capital goods, consumer durables, pharmaceuticals, and infrastructure sectors will find this fund aligns well with their thematic investment goals. The fund's active management approach allows it to adapt to market changes and capitalize on emerging opportunities, making it suitable for investors who prefer a more hands-on investment strategy.
The performance of these funds is heavily tied to the manufacturing sector. If manufacturing companies perform well, the funds will likely see good returns. However, given the headwinds in play the sector can also be sluggish or volatile, leading to potential losses. Investors comfortable with this inherent risk might consider these funds.
Both the Kotak Manufacture in India Fund and the ICICI Prudential Manufacturing Fund are suitable for long-term investors with a moderate to high-risk tolerance who believe in the growth potential of the Indian manufacturing sector. The Kotak Manufacture in India fund, with its slightly lower volatility and better risk-adjusted returns, might be more appealing to those seeking a slightly more stable investment. Whereas the ICICI Pru Manufacturing Fund's consistent returns and long-term track record could be a considerable factor for many investors.
However, do note these funds focus on carrying a concentrated portfolio related to a specific sector. Ensure they complement your existing portfolio allocation to spread risk.
Powering Progress: Can India Become a Global Manufacturing Hub?
India’s manufacturing sector stands at a crucial juncture. With a strong domestic market, a skilled workforce, and government initiatives, the growth potential is undeniable. However, several challenges need to be addressed to fully realize this potential.
India boasts a young and growing population, creating a large domestic consumer base and a readily available workforce. Trade wars and disruptions in global supply chains present an opportunity for India to emerge as a reliable manufacturing alternative.
Despite the positive PMI reading, the manufacturing sector faces several challenges like – Inadequate physical and technological infrastructure can hinder efficient logistics and production processes. The existing skillset of the workforce might not be fully aligned with the demands of high-tech manufacturing. Complex regulations and bureaucratic procedures can impede the ease of doing business. Established manufacturing giants and emerging economies pose stiff competition in the global market.
Overall, the future of India’s manufacturing sector is promising, but success hinges on addressing the challenges. By focusing on skill development, improving infrastructure, and streamlining regulations, India can capitalize on its demographic dividend and become a global manufacturing powerhouse.
To conclude…
The ICICI Prudential Manufacturing Fund is suitable for investors looking for diversified exposure within the manufacturing sector, while the Kotak Manufacture in India Fund is ideal for those who are bullish on the ‘Make in India’ initiative and its targeted sectors. Each fund caters to different thematic preferences and risk appetites, making it crucial for investors to evaluate their individual goals and consult with financial advisors to ensure the chosen fund aligns with their overall investment strategy.
Disclaimer: PersonalFN does not receive any monetary compensation from the fund house or scheme names stated in the article.
This article first appeared on PersonalFN here
