Tata Mutual Fund has launched the Nifty 500 Multicap India Manufacturing 50:30:20 Index Fund. This will be the first multi-cap passive fund focused on the manufacturing sector. As a theme, manufacturing funds have outperformed the larger market (Nifty 500) over the past one, three and five years. The government focus on domestic manufacturing (Production Linked Incentives, for example) and favourable macro factors (China plus one strategy) are expected to sustain this momentum this decade.

Broader access

Until now, manufacturingindices typically had an inherent large-cap tilt because of their construction based on market-cap weights. The top constituents in the Nifty India manufacturing index are Mahindra & Mahindra, Maruti and Reliance Industries with weightage of 5 per cent each. In a high-growth market such as India, mid- and small-cap companies could provide investors the scope for higher returns albeit with higher risk. As illustrated in the chart below, the Nifty Midcap 150 and Nifty Smallcap 250 have outperformed the Nifty50 by a good margin over multiple time periods.

Hence the multi-cap index could help capture this better. Tata AMC has co-created the index for the Nifty500 Multicap India Manufacturing 50:30:20 (NMIM), along with Nifty Indices (National Stock Exchange of India).

Index composition

NMIM will have 75 constituents, the weights of which will be based on their free-float market capitalisation with overall weight to large-, mid- and small-caps fixed at 50 per cent, 30 per cent and 20 per cent respectively. The weight of each stock will be capped at 10 per cent at the time of index rebalancing. The auto and auto components sector is the leading contributor to the index with an aggregate weight of 28 per cent, followed by healthcare, capital goods, and oil & gas with weight of 22 per cent, 13 per cent, and 12 per cent respectively. These top four sectors constitute nearly 75 per cent of the index. They are in the midst of a strong upcycle with auto and auto components benefitting from strong domestic consumption. Both pharma and hospitals in the healthcare space have a long structural opportunity with rising insurance coverage in India.

Reliance Industries (9.96 per cent), Sun Pharmaceutical and Tata Motors (4.88 per cent each), and Mahindra & Mahindra (4.8 per cent) are the top constituents in the index. Among the small- and mid-caps, some of the notable constituents include Cummins India (2.05 per cent), PI Industries (1.56 per cent), Bharat Forge (1.45 per cent), MRF (1.36 per cent), Ashok Leyland (1.24 per cent) and Sanofi (0.47 per cent).

Peer comparison

The manufacturing theme (including both active and passive funds) currently has eight options with only ABSL and ICICI Prudential having a track record beyond a year. ICICI Prudential Manufacturing Fund has consistently outperformed the benchmark Nifty India Manufacturing index over the one-, three- and five-year period. Even though the active funds have the option to invest in small- and mid-cap companies, it is completely discretional. The Navi Nifty India Manufacturing Index Fund is one of the passive options, but its benchmark is large-cap tilted.

According to Bloomberg consensus estimates, the Nifty Midcap 100 and Smallcap 250 indices are currently trading at a multiple of 24.9x and 19.3x respectively on CY25 earnings, with forecasted earnings growth of nearly 25.6 per cent and 19.1 per cent. The large-cap Nifty 50 is trading at 18.3x with CY25 earnings growth of 13.7 per cent. Valuations for the mid-cap and small-cap indices with the forecasted earnings growth appear favourable relative to the large-cap index.

The Tata Multicap Manufacturing Index fund rides on the positive outlook of manufacturing as a theme and the high growth potential of the small- and mid-cap stocks (albeit at higher risk). Investors with a high-risk appetite and long investment horizon may consider investing in the NFO. The NFO is open from April 8-22.