Automobile Sector: Gear up Your Investment Portfolio with These Top 5 Mutual Funds

November 1, 2023 Mutual Fund

The automobile sector in India is among the most significant and rapidly growing industries in the nation. It includes a broad variety of vehicles, including motorcycles, three-wheelers, commercial vehicles, and passenger cars.

Since the automobile industry is essential to both macroeconomic growth and fostering technological innovation, it has historically been a reliable indication of the state of the Indian economy.

Being the world’s largest tractor manufacturer, second-largest bus manufacturer, and third-largest heavy truck manufacturer, India holds a dominant position in the heavy vehicle sector. The percentage of the national GDP attributed to the vehicle industry grew from 2.77% in 1992-1993 to approximately 7.1% at present. It employs about 19 million people directly and indirectly.

[Read: Top 5 Mutual Funds That Are Betting on the Manufacturing Boom]

After surpassing Japan in 2022, the Indian automobile industry was listed as the third largest in the world. However, by 2023, it ranked as the fourth-largest manufacturer of commercial cars. It is anticipated to rise by 7% to 10% in the upcoming fiscal year.

The Indian Automobile Industry

India’s annual production of automobiles in FY22 was 22.93 million vehicles. India has a strong market in terms of domestic demand and exports.

Given India’s youthful population and expanding middle class, the two-wheeler category leads the industry in terms of sheer volume within the Indian automobile sector. Due to the growth of the Indian middle class, the two-wheeler market dominated the auto industry, accounting for 19.45 million vehicle sales in FY23.

India’s domestic vehicle market has been growing steadily. The desire for cars has been driven by a number of factors, including an expanding middle class, more disposable income, better road infrastructure, and simple financing availability.

According to the SIAM report, India’s automobile industry achieved a remarkable feat in September 2023 by reporting record monthly sales as follows:

• Passenger Vehicles at 3,61,717 units
• Three-wheeler sales were 74,418 units
• Two-wheeler sales were 17,49,794 units
• Commercial Vehicles sales were 2,47,929 units in July-September 2023

This remarkable surge in sales was primarily driven by automakers accelerating dispatches from their factories, strategically building inventories ahead of the festive seasons of Dussehra and Diwali.

Furthermore, the increasing curiosity of businesses to investigate the rural markets contributed to the sector’s expansion. The rising demand for commercial vehicles is increasing due to the growth of the passenger transport and logistics industries. New trends, such as the electrification of vehicles-particularly three-wheelers and small passenger cars-are expected to fuel market expansion in the future.

Government Measures to Boost the Growth of Indian Automobile Industry…

The FAME Scheme was extended for a further period of 2 years up to 31st March, 2024. In the Union Budget 2022-23, the government laid out the following initiatives:

• The government introduced a battery-swapping policy, allowing drained batteries to be swapped with charged ones at designated charging stations, thus making EVs more viable for potential customers.
• India’s National Highways would be expanded by 25,000 km in 2022-23 under the Prime Minister’s Gati Shakti Plan.

A $3.5 billion Production-Linked Incentive (PLI) Scheme for the automobile and auto component industry was announced by the Indian Government. In order to attract investors, promote the sales of locally made goods, and increase domestic manufacturing of innovative automobile technology products, the scheme offers financial incentives of up to 18%.

In FY 2022-23, total passenger vehicle sales reached 3.89 million, and total automobile exports from India stood at 47,61,487. The growing demand for automobiles also prompted a significant increase in original equipment and auto component manufacturers.

India thus gained proficiency in producing cars and auto parts, which increased international demand for Indian automobile and auto components.

Indian Automobile Stocks

Automobile and auto component industry in India have been one of the best-performing sectors in recent times. India’s auto sector has experienced unprecedented growth, and as per historical data, the Nifty Auto index has consistently outperformed the Nifty50 over the past decade.

The auto industry is doing fairly well despite several obstacles over the past few years, such as supply chain interruptions and regulatory changes. A number of factors, including growing disposable income, robust demand for automobiles and trucks, and a growing government focus on infrastructure development, are projected to propel the auto industry’s growth over the coming years.

As the automobile industry grows at an exponential rate, there are several stocks that are making headlines. Among the well-known auto stocks are Eicher Motors, Mahindra & Mahindra, Bajaj Auto, TATA Motors, and Maruti Suzuki.

Due to their recent strong performance, these stocks have gained popularity among all investors. However, not every investor is cut out for direct equity investment. As a result, investors who want to take advantage of the automobile industry’s development potential while avoiding the high risk associated with stocks may consider investing in mutual funds.

[Read: The 4 Key Market Trends that Could Drive Mutual Fund Growth]

Investors can select the best mutual funds that have a significant allocation to stocks of automobiles and auto component manufacturers. The top 5 mutual funds with high exposure to the automobile sector are listed below.

#1 UTI Transportation & Logistics Fund (Sectoral Fund)

UTI Transportation & Logistics Fund invests predominantly in equity and equity-related securities of companies engaged in the transportation and logistics sector. The scheme invests across market cap, and as of September 2023, it holds 69.26% allocation in large caps, 17.46% allocation in mid-caps and 7.09% in small caps.

UTI Transportation & Logistics Fund – Allocation to Automobile Stocks

Data as of September 30, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme holds a maximum exposure of 12.88% in stocks of Mahindra & Mahindra Ltd., which is an Indian multinational automobile manufacturing corporation. M&M is one of the largest vehicle manufacturers by production in India, and it’s sales volume surged by 20% to 41,267 units in September.

The scheme also carries an allocation of 12.78% to Maruti Suzuki India Ltd. and 11.36% to Tata Motors Ltd. Along with a fair allocation to other market leaders in the sector, such as Bajaj Auto, Eicher Motors Ltd., Hero Motocorp Ltd., etc., the scheme’s overall allocation to Automobile stocks accounts for 69.24% of its total assets.

#2 ICICI Pru Transportation and Logistics Fund (Thematic Fund)

Launched in October 2022, ICICI Pru Transportation and Logistics Fund invests predominantly in equity and equity-related securities of companies engaged in the transportation and logistics sectors. The scheme currently has an AUM of Rs 2496.50 crore and is benchmarked against NIFTY 50 TRI.

Bear in mind that the scheme is new in the market and does not carry a long performance track record; thus, investors may consider their suitability before investing in it.

ICICI Pru Transportation and Logistics Fund – Allocation to Automobile Stocks

Data as of September 30, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

As of September 30, 2023, the scheme invests 58.13% in large caps, 15.59% in mid-caps and 16.68% in small-cap stocks.

ICICI Pru Transportation and Logistics Fund holds maximum exposure in stocks of companies like – Maruti Suzuki India Ltd., which is a subsidiary of Suzuki Motor Corp. The organisation reported selling 150,812 units last month, marking a 1.6% increase compared to the same period in the previous year. This achievement includes selling over a million vehicles in half a year, driven by strong demand for SUVs like the Fronx, Jimny, Brezza, and Grand Vitara.

The scheme also invests in leading automobile manufacturers like TVS Motor Company Ltd., Mahindra & Mahindra Ltd. and Tata Motors Ltd. Currently, the overall exposure to Automobile stocks accounts for 54.93% of the scheme’s assets.

#3 – HDFC Transportation and Logistics Fund (Thematic Fund)

Launched in August 2023, HDFC Transportation and Logistics Fund is categorised as a thematic scheme investing predominantly in equity and equity-related securities under the transportation and logistics theme.

Currently, the scheme holds an AUM of Rs 541.95 crore. As of September 2023, the fund has a 44.61% allocation in large-cap stocks and 15.65% in mid-cap stocks, whereas 26.09% in small-cap stocks. Do note it has a higher allocation to small-cap stocks, which are highly risky and sensitive to market fluctuations.

HDFC Transportation and Logistics Fund – Allocation to Automobile Stocks

Data as of September 30, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme has an overall allocation of 53.11% to Automobile and Auto component stocks. The highest exposure of 11.75% is in Maruti Suzuki India Ltd. In addition, the scheme has decent exposure to Tata Motors Ltd. and Bajaj Auto Ltd. which is India’s second-largest two-wheeler manufacturer.

However, since the scheme has been launched recently in the past few months, it does not carry a long performance track record, and there is no sufficient data to analyse the success of this investment strategy. Thus, investors may consider their suitability before investing in it.

#4 Bandhan Transportation and Logistics Fund (Thematic Fund)

Launched in October 2022, the scheme endeavours to create a portfolio by investing predominantly in equity and equity-related securities of companies engaged in the transportation and logistics sector.

Bandhan Transportation and Logistics Fund – Allocation to Automobile Stocks

Data as of September 30, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

In terms of Automobile stocks, the scheme holds a high allocation of around 7.91% in Tata Motors Ltd., which is a leading manufacturer of trucks, buses, tractors and cars. The company has been in operation since 1992. The company’s key brands include Jaguar Land Rover (JLR), Land Rover, Jaguar and Range Rover.

Tata Motors expects the demand momentum to continue growing in the upcoming festive season, with promising prospects for the industry. In the commercial vehicle segment, Tata Motors recorded a 13% increase in sales, with 37,214 units sold in September.

The scheme has an overall allocation of 43.67% to Automobile and Auto component stocks. As of September 2023, the fund has a 42.20% allocation in large-cap stocks and 18.13% in mid-cap stocks, whereas 29.66% in small-cap stocks. Do note it has a higher allocation to small-cap stocks, which are highly risky and sensitive to market fluctuations.

#5 ICICI Pru Manufacturing Fund (Thematic Fund)

Launched in 2018, ICICI Pru Manufacturing Fund invests in equity and equity-related securities of companies engaged in manufacturing themes. The fund has 52.52% allocation to large-cap stocks, 22.02% in mid-cap stocks, and 6.62% in small-cap stocks.

Currently, the scheme holds an AUM of Rs 1387.40 crore and is benchmarked against Nifty 50 TRI.

ICICI Pru Manufacturing Fund – Allocation to Automobile Stocks

Data as of September 30, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The overall allocation to Automobile stocks is around 20.95%, and the highest is in stocks of Maruti Suzuki India Ltd. The scheme also holds fair exposure to other stocks like – Tata Motors Ltd. and Hero MotoCorp Ltd., which is a manufacturer of motorcycles, scooters, and auto-rickshaws in India.

It is one of the largest manufacturers of two-wheelers in India; the company also manufactures engines for other automobile companies such as Mahindra & Mahindra (M&M), Tata Motors, and Ford Motor Company.

Sectoral mutual funds take at least a few years to reach their potential. However, investors may consider taking a plunge into these mutual funds only after thorough market research and assessing their financial goals.

[Read: How to Strategically Approach Equity Mutual Funds in Volatile Markets]

The Road Ahead for Indian Automobile Industry

The transportation industry is experiencing new prospects driven by the rapid globalisation of the world, particularly with the move towards electric, electronic, and hybrid cars, which are thought to be more dependable, safe, and efficient forms of transportation.

Unprecedented developments brought about by electrification and alternative green power trains, the rise of electronic components and software, autonomous driving, and shared mobility are reshaping the sector.

In August 2022, the government introduced India’s first double-decker electric bus in Mumbai. The government believes that a long-term revamp of the nation’s transport infrastructure is required. In response to rising consumer demand for greener mobility options, the government is implementing rules and a strategy to encourage a larger use of electric vehicles. The automobile sector will play a vital role in the green energy transition.

[Read: Top 5 Mutual Funds with High Exposure to EV Revolution]

India’s automobile sector enjoys a competitive edge due to its large pool of skilled professionals in engineering, design, manufacturing, and other relevant areas at relatively lower labour costs than developed nations.

As a result, the automobile sector provides excellent opportunities for people in the labour force. It is estimated that India is set to become a leader in shared mobility with a focus on electric and autonomous vehicles to reduce emissions by 2030.

To sum up, India’s automobile sector presents a great opportunity for investors to diversify and add auto stocks to their investment portfolios. However, investors must make informed investment decisions and consider their risk profile, investment horizon, and goals before investing.

This article first appeared on PersonalFN here