Should you invest in India’s first two auto icc-traded funds?

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India’s first two Auto ETFs from Nippon India and ICICI Pru Mutual Fund are open for subscription from 5 January. These are both open ended schemes replicating/ tracking Nifty Auto Index, which reflects the performance of the automobile segment in the country. The index comprises 15 stocks, including large vehicle manufacturers and auto ancillaries and tyre makers.

The stocks for the index are selected based on free-float market capitalization from the Nifty 500 companies and will be rebalanced semi-annually.

The expense ratio for the scheme from both the fund houses is around 20 basis points or 0.2% per annum.

Should you invest?

The Nifty Auto Index after being an outperformer (over the Nifty 50) for more than half of the last decade, have underperformed in the last four years on the back of lower uptick in the consumer demand, threat of electric vehicles and supply-side constraints.

With recovery in the broader market, the Nifty Auto Index went up in the last 2 years (although on a lower base) but still lags the Nifty 50’s performance. As per the note from ICICI Pru MF, the stocks of the automobile companies are cyclical in nature. Their profits rise and fall with consumer confidence along the economic cycles – expansion, peak, recession, and recovery.



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“The Auto sector is at the cusp of a turnaround with a return to normalcy post-covid already underway. Valuations are at a discount to long term averages unlike other sectors (4.4 times P/B vs 10 year average of 5 times). Margins and return ratios are expected to improve significantly in an expected cyclical recovery, after taking a beating in the down-cycle in the past few years.” said Suvajit Ray, Head – Products, IIFL Securities.

A report from ICICI Securities also suggest that “faster vaccination leading to opening up of workplaces and educational institutes could aid revival of transportation segments (e.g. 3Ws/buses/scooters) in CY22.”

Experts say that investors can have a tactical exposure to the sector.

“Auto ETF can be a part of a well-diversified MF portfolio of an investor as a part of passive fund allocation. They can have an exposure up to 10% depending on the tactical outlook for the sector and investment horizon.” added Ray.

Not just this, any sectoral exposure should be for tactical asset allocation rather than strategic asset allocation purpose, said Rushabh Desai, founder, Rupee with Rushabh Investment Services

Santosh Joseph, founder and managing partner, Germinate Investor Services, LLP said that an investor have to be fully cognizant of why they are buying the idea. “Autos remain a subset of mobility sector. There’s a reason to believe that mobility has got future in the domestic market” he added.

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