Top 5 Mutual Funds That Are Betting on the Manufacturing Boom

September 2, 2023 Mutual Fund

The Indian Manufacturing sector has demonstrated continued strength in the previous year 2022, and surpassed expectations despite supply headwinds, labour shortages, and an uncertain economic environment.

The worldwide recovery gained momentum last year following the rising demand, industrial production, and capacity utilisation surpassed pre-pandemic levels midyear, with strong increases in new orders. The Manufacturing sector is emerging from the pandemic lows, eying growth despite turbulences with a positive trajectory for 2023.

India has a huge opportunity to become a ‘Global Manufacturing Hub’ in this decade, according to the Economic Survey 2022-23, which was presented at the Budget Session of Parliament for FY 2023-24. The Manufacturing sector in India is one of the largest in the world and also one of the fastest-growing sectors in any economy.

According to the Economic Survey, the three most important elements for grasping this unique opportunity are the potential for strong domestic demand, the Government’s commitment to boost Manufacturing, and a particular demographic advantage, including a sizeable share of the youthful labour force.

By 2030, India could export items worth USD 1 trillion, making it the third most sought-after location for Manufacturing in the world. In May 2023, India’s Index of Industrial Production (IIP) increased by 5.2% YoY, which included Manufacturing expansion with a 5.7% YoY increase in output.

The Manufacturing industry in India is expanding and offers significant investment opportunities. The country’s economy is being fueled by its rising competitiveness, greater import substitution and export potential, and rising global demand for Indian products. Although there may be variations in some sub-sectors, the Manufacturing sector’s long-term trend is still positive. This is driving investors’ interest in Manufacturing stocks in India.

[Read: How to Choose Mutual Funds For Your Investment Portfolio]

This growth trajectory could be quite advantageous for investors who find Manufacturing companies with excellent capabilities and a track record of successful management. The cyclical nature of the Manufacturing industry offers opportunities for substantial profits, particularly for businesses with strong capabilities and forward-thinking leadership.

As India’s Manufacturing story unfolds, seeking its growth trajectory could possibly unlock great investment opportunities for investors in the long term.

Manufacturing Stocks: The Next Big Investment Theme

As the name suggests, Manufacturing stocks are the stocks you purchase from companies that are engaged in Manufacturing activities across various products and services. Small and Medium-sized businesses (SMEs) predominate in India’s Manufacturing sector. These businesses produce goods that are mostly used domestically or for export.

However, they also produce large quantities of finished goods for domestic consumption and export, helping reduce India’s trade deficit. Since its independence from British colonial authority in 1947, India has emerged as a global leader in a number of high-tech industries, including the production of automobiles and information technology services.

The Government has implemented a number of supply-side policies in recent years to boost Manufacturing. As a result, India has emerged as one of the favourite destinations for investments from both within and outside. The Government has enacted a variety of strategies to endorse the Manufacturing industry.

In September 2014, the Prime Minister of India, Mr Narendra Modi, had launched the ‘Make in India’ program (as a part of India’s renewed focus on Manufacturing) to place India on the world map as a Manufacturing hub and thereby give global recognition to the Indian economy.

The Manufacturing industry in India is seeing a beneficial convergence of factors that will fuel its expansion. The nation now has more developed Manufacturing capabilities, giving it a cost-competitive advantage internationally.

Today, technology has stimulated innovation, with digital transformation being a crucial component in achieving an advantage in this fiercely competitive industry. Manufacturing is emerging as an integral pillar in the country’s economic growth, thanks to the performance of key sectors like automotive, engineering, chemicals, pharmaceuticals, and consumer durables.

According to market experts and historical data, sectors experiencing rapid growth have witnessed companies generating remarkable returns, and this trend is expected to continue in the Manufacturing sector.

The growth potential of the Manufacturing sector is what has caught investors’ attention, and many are keen to invest in Manufacturing stocks. However, instead of investing in direct equities, one may consider investing in Manufacturing stocks through mutual funds.

[Read: Begin with Minimum Investment in Mutual Funds And Watch Your Money Grow]

If you are an investor who wants to seize profit from the expansion of Manufacturing industry, here’s a list of the top 5 Mutual Funds with a high allocation to Manufacturing stocks:

#1 – ICICI Pru FMCG Fund (Thematic Fund)

ICICI Pru FMCG Fund invests in stocks of securities forming part of the FMCG sector in India. The scheme invests across market cap, and as of July 2023, it holds 68.24% allocation in large caps, 6.59% allocation in mid-caps and 15.51% in small caps.

ICICI Pru FMCG Fund – Allocation to Manufacturing Stocks

Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

ICICI Pru FMCG Fund holds a maximum exposure of 28.55% in stocks of ITC Ltd., which is an Indian Manufacturing conglomerate with businesses spanning Fast Moving Consumer Goods comprising Foods, Personal Care, Cigarettes and Cigars, Education and stationery Products, Incense Sticks and Safety Matches; Hotels, Paperboards and Packaging, Agri Business, and Information Technology.

The scheme also carries an allocation of 19.10% to HUL Ltd., a British-owned Indian consumer goods company with 50+ brands spanning 16 categories, such as fabric solutions, home and hygiene, life essentials, skincare, hair care, oral care, deodorants, tea, coffee, ice cream & frozen desserts, food and health food drinks, the Company is a part of the everyday life of millions of consumers.

Along with a fair allocation to other market leaders in the sector, the scheme’s overall allocation to Manufacturing stocks accounts for 61.57% of it’s total assets.

#2 SBI Equity Minimum Variance Fund (Thematic Fund)

SBI Equity Minimum Variance Fund invests predominantly in a diversified basket of companies in the Nifty 50 Index while aiming to minimise portfolio volatility. The scheme currently has an AUM of Rs 157.25 crore and is benchmarked against NIFTY 50 TRI.

SBI Equity Minimum Variance Fund – Allocation to Manufacturing Stocks

Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

As of July 2023, the scheme invests 99.70% which is almost all of its assets in large caps. SBI Equity Minimum Variance Fund holds maximum exposure in stocks of companies like – Cipla Ltd. at 8.93% and Nestle India Ltd. at 7.71% (leading companies from the FMCG sector who emphasise on Manufacturing daily need consumer goods). Currently, the overall exposure to Manufacturing stocks accounts for 45.90% of the scheme’s assets.

#3 – Tata India Consumer Fund (Sectoral Fund)

Tata India Consumer Fund is categorised as a sectoral scheme that invests in a concentrated portfolio of equity & equity-related instruments of the companies in the consumption-oriented sectors in India.

Currently, the scheme holds an AUM of Rs 1,597.39 crore. As of July 2023, the fund has a 51.52% allocation in large-cap stocks and 16.47% in mid-cap stocks, whereas 24.75% in small-cap stocks. Do note it has a higher allocation to small-cap stocks, which are highly risky and sensitive to market fluctuations.

Tata India Consumer Fund – Allocation to Manufacturing Stocks

Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme has an overall allocation of 37.65% to Manufacturing stocks. The highest exposure of 9.94% is in ITC Ltd. and 6.88% in Nestle India Ltd. In addition, the scheme has decent exposure to market leaders like Tata Consumer Products Ltd., Dabur India Ltd. and Zydus Wellness Ltd.

#4 Quant ESG Equity Fund (Thematic Fund)

Launched in November 2020, the scheme endeavours to create a portfolio substantially constituted of companies demonstrating sustainable practices across Environmental, Social and Governance (ESG) parameters.

Quant ESG Equity Fund – Allocation to Manufacturing Stocks

Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

In terms of Manufacturing stocks, Quant ESG Equity Fund holds a high allocation of around 7.81% in Bikaji Foods International Ltd. (India’s largest ethnic snacks Manufacturing brand). The fund also has exposure to Aurobindo Pharma, a fully integrated pharma company from the Manufacturing industry.

The scheme has an overall allocation of 28.03% to Manufacturing stocks. As of July 2023, the fund has a 47.16% allocation in large-cap stocks and 9.83% in mid-cap stocks, whereas 23.72% in small-cap stocks. Bear in mind it has a high exposure to small-cap stocks.

#5 Mirae Asset Great Consumer Fund (Sectoral Fund)

Launched in 2013, Mirae Asset Great Consumer Fund invests in a portfolio of companies/funds that are likely to benefit directly or indirectly from consumption-led demand in India. The fund has 63.59% allocation to large-cap stocks, 11.52% in mid-cap stocks, and 22.55% in small-cap stocks.

Mirae Asset Great Consumer Fund – Allocation to Manufacturing Stocks

Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The overall allocation to Manufacturing stocks is around 26.95%, and the highest is in stocks of ITC Ltd. The scheme also holds a fair exposure to other Manufacturing stocks like – HUL, Ceat Ltd., Nestle India Ltd., etc. Currently, it holds an AUM of Rs 2,552.57 crore.

In addition to these mutual funds, the recently launched Quant Manufacturing Fund on July 26, 2023, aims to invest in companies that are part of the Manufacturing theme in India/Overseas. It endeavours to hold a majority of its allocation to Manufacturing stocks.

However, do note 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 this scheme.

Outlook for the Manufacturing Sector in India

India’s Manufacturing sector is gradually moving towards more automated and process-driven Manufacturing, which should improve efficiency and enhance industry production.

India’s Manufacturing sector has expanded into new areas and market segments due to growth in priority industries and positive megatrends. Under the ‘Aatmanirbhar Bharat’ and ‘Make in India’ projects, significant measures have been launched to improve India’s Manufacturing capacity and exports across industries.

According to a report, the Government’s Make-in-India initiative has facilitated investment, encouraged investment, and created world-class infrastructure. Additionally, deficiencies in domestic Manufacturing capacity have been rectified.

Sector specific Production Linked Incentives (PLI) have been introduced in the aftermath of the pandemic to encourage domestic and foreign investment and to create global Manufacturing industry leaders. The Indian Government intends for Manufacturing to account for 25% of the nation’s economic output by 2025 through the execution of several programmes and policies.

The immense size and capacity of the domestic market, the cheaper cost of labour, the steadily increasing infrastructure, and connectivity, among other things, have all contributed to make India a lucrative investment destination for foreign Manufacturing companies.

India now possesses the physical and technological infrastructure needed to increase the Manufacturing sector’s contribution to the economy and realistically compete for a key position in global supply chains.

With a 6.03% increase during FY23, Manufacturing exports reached the highest annual export total ever of US$ 447.46 billion, breaking the previous year’s record export total of US$ 422 billion. India’s Manufacturing industry has the potential to generate $1 trillion in revenue by 2025.

To conclude…

Considering all the aspects related to the Manufacturing industry, it is projected that it has a positive outlook in the long run, and this makes it a beneficial investment choice for individual investors seeking long-term capital growth. Investors can gain exposure and benefit from the growth of the Manufacturing sector by indirectly investing in Manufacturing stocks via mutual funds.

[Read: 7 Top-performing Large Cap Mutual Funds with High Returns on 5-Year SIP]

However, before making an investment, it is important to run a detailed analysis of the holding companies under the Manufacturing theme and performance of the mutual fund schemes. Also, one must ensure their suitability to the mutual fund schemes with a high allocation to Manufacturing stocks based on their risk appetite, investment horizon, and objectives.

This article first appeared on PersonalFN here