What are Auto Sector funds? Are they a good investment option?
In this reviving mode of the automobile sector, investing in auto sector mutual funds is one of the best decisions investors can make to attract excellent growth prospects. Indeed, the auto sector suffered a major setback under the impression of pandemic Covid 19, but time has changed. It's on a roll now with increasing demand, reducing metal and crude prices, and is set to bring better growth and return opportunities for investors.
What are auto sector funds?
Auto sector funds are open-ended,thematic equity mutual funds that invest in automobile manufacturers and auto ancillaries.
There are currently three top auto sector mutual funds in India. Out of them, two are Auto ETFschemes (ICICI Prudential Nifty Auto and Nippon India Nifty Auto), and one is a transportation and logistics mutual fund. Both auto ETF schemes intend to track the performance of the Nifty Auto Index. Whereas transportation and logistics mutual funds employ a diversified investment strategy by investing not only in automobile manufacture and auto ancillaries but also in transportation and logistics, wherein at least 80% of assets gets invested.
Auto sector funds focus on generating higher returns over a long time. Hence mutual funds with the automobile sector are suggested for investors with a long investment horizon.
Advantages of investing in auto industry mutual funds
Here are a few advantages of investing in the auto sector fund investors should know to reap the maximum benefits from their investment.
- Potentially growing sector: The auto sector is expected to be one of the fastest growing sectors domestically and internationally, all thanks to the reduction in manufacturing prices and rising demand for the products and services, indicating enormous growth potential. For the coming 5-10 years, the outlook seems favorable. The auto sector may show volatility in the short term, but long-term prospects are positive, making it one of the promising sectors to venture in.
- Diversifies your portfolio: With auto sector mutual funds, you would have the advantage of investing in the ever-expanding automotive market sector. If you haven't invested in auto sectors before, these funds help you diversify your portfolio. Since these funds are risky and volatile, you can immunize the risk factors by opting for a SIP (systematic investment plan). It will help you spread your investment and save you from incurring losses.
- Better Returns over time: Auto sector funds seek long-term growth opportunities by investing in companies with a strong financial background to gather better returns for investors. For investors who are planning for long-term investments, auto sector funds are the best opportunity to earn attractive returns.
- Brings a sense of security: The auto sector is here to stay and rule, and one can expect its value to grow with time. It may hit bottoms at times, but it's never going out of demand, which instills a sense of security to the investors to see this sector as a potential contender to invest in the mutual fund auto sector.
What parameters do you need to consider before investing in auto funds?
Below are the following parameters that investors must consider before investing in the best auto sector mutual funds.
- Portfolio diversification: Auto funds are thematic funds, so it's clear that they don't offer much portfolio diversification as these funds invest majorly in automobile manufacturers and auto ancillaries which involves limited stocks. Also, there is considerable equity contribution in auto funds, which makes them highly risky and volatile. If you wish to invest in automobile sector mutual funds, keep your exposure to 10% of your portfolio.
- Risk factor: Investing in any equity fund is a risky bet, and auto funds are no different. If you are a new investor, you must research and get a complete understanding of these funds. Also, make sure to get your risk profiling done beforehand to gauge an idea about how much risk you can bear. Once you are sure about the risk and other consequences, then only consider investing money in these funds.
- Investment horizon & method: Mutual funds are for the long term and since auto funds are one among them, consider investing in these funds if you have a long investment horizon, say 5 to 10 years. For short-term investments, auto sector mutual funds can be very risky. So, plan your investment duration wisely while including your exit strategy to get
For investing, there are two modes: lump sum and SIP. In lump sum, you can invest a large corpus at once, and in SIP, you can invest through periodic payments. With SIP, you can adjust the investment duration and amount as per the performance of the funds, which is not the case with lump sums where all your invested money is at risk.
- Performance of fund house and manager: The success of a mutual fund for the auto sector scheme has a lot to do with the expertise and experience of the respective AMC. Hence, you must consider checking the track record of the AMC, the expense ratio they are charging to manage your funds, and more. This research will help give you an idea of how your chosen fund scheme will perform in the future.
- Compare the fund performance with its contemporaries: Before investing in auto funds, it's crucial to compare the performance of your chosen fund scheme with its established peers in the same category. Doing so will help you find your fund's position in the market and understand whether it can give better or equivalent returns as they are offering to the investors.
Auto sector funds VS other sector funds
Mutual funds investing in the auto sector and other sector funds are similar in many ways. All these funds are equity funds that invest 80% of their assets in equity and across all market caps. And are suitable for investors with high-risk capacities and long investment horizons. However, their performance and ability to generate returns depend on how well their respective sectors or themes perform. On the downside, both can spoil your profits quickly. Hence timing becomes paramount, especially for your exit, if you want to achieve the best returns.
The following table exhibits the performance of various sectoral funds over time.
|Sector||1 year||3 year||5 year|
Although there are benefits of investing in mutual funds in the automobile sector, as an investor, you must remember that these funds come with high degrees of risk. If you are an investor who is new to the world of mutual fund investment or has limited knowledge of sector thematic funds, you should avoid investing in these funds. Proficient investors looking for new opportunities for wealth creation and having an appetite for a risky investment may plan to invest in auto funds. However, before investing in auto funds, understand various impacting factors that affect the fund's performance.