Mutual Funds

Should you invest in the NFOs of ICICI Pru and Nippon India Nifty Auto ETF?

Parvatha Vardhini C | | Updated on: Jan 08, 2022
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An active stock picking strategy suits this sector in the midst of EV disruption

Nifty Auto ETF NFOs from ICICIPru MF and Nippon MF are open for subscription currently. The funds will passively track the Nifty Auto Index, comprising 15 stocks from the auto and auto components space. Maruti Suzuki (19.5 per cent weight), Tata Motors (17.11 per cent), Mahindra & Mahindra (15.85 per cent), Bajaj Auto ( 8.37 per cent) and Eicher Motors (7.15 per cent) are the top constituents.

Battery makers Exide and Amara Raja batteries, tyre companies MRF and Balkrishna Industries and diversified players such as Bosch and Bharat Forge are the key players from the components space forming part of the index.

Two factors have gone into the launch of an auto fund at this juncture.

Why now?

With the markets seeing a rally from March 2020, buying opportunities are not getting any easy. The auto sector has not been in the pink of health in the last two to three years and the Nifty Auto Index has been an underperformer compared with other sectors and with the Nifty.

In the last year, the Nifty Auto Index clocked just short of 20 per cent returns, underperforming the Nifty by 5-6 percentage points. The metal, realty and IT indices, on the other hand, have topped the one-year charts. Over the last two- and three- year periods, too, which largely corresponds with the current downturn in the auto sector, the Nifty Auto has underperformed the Nifty in terms of absolute returns. While the third Covid wave and chip shortage issues may still put some spokes in the wheel in the near-term, the auto cycle is expected to see an upturn sooner than later. An investment at this juncture would help ride the upcycle, is the premise.

Secondly, SEBI’s strict re-categorisation norms for mutual funds that came out in 2017/18 has meant that fund houses cannot hold more than one fund in each category.

Hence, thematic as well as passive launches have been the only way out in the ongoing NFO season, if a fund house already has a presence in each of the categories delineated by the regulator. ICICI Pru MF has, for instance, sectoral ETFs based on the Nifty Healthcare, FMCG, IT, Bank, Private Bank and Consumption indices. Of these, the FMCG, Consumption and Healthcare ETFs were launched in 2021 and the IT and the two Bank ETFs were launched in 2019. Nippon, too, launched ETFs based on the IT and Pharma indices in the last two years. It is only natural that fund houses try to fill the gap with yet another passive fund launch when market sentiments haven’t weakened yet.

A new theme helps catch investor attention and shore up AUMs relatively easily, too.

Is it worth investing?

While it is true that an investment in auto stocks now may help ride the recovery, some auto stocks which are part of the index have delivered index as well as market-beating returns in the last year.

For instance, the announcement of the setting up of a separate EV (electric vehicle) subsidiary for passenger vehicles at valuation of about $9 billion largely helped the Tata Motors stock gain in recent months. It is up 148 per cent in the last year.

At the same time, other Auto index heavyweights such as Maruti Suzuki, Bajaj Auto and Hero MotoCorp have delivered negative to low single digit one-year returns. Lacklustre new vehicle sales domestically as well as being slow starters in the EV game has been a double whammy for these stocks. Smaller stocks outside the index such as Fiem Industries and JBM Auto, have also been riding the EV wave, more than doubling in the last year.

With the sector in the midst of disruption caused by the growing push for clean energy and environment, ethanol blending and EV are themes that will be driving auto stocks in next few years. The EV push is leading to a scenario where even stocks from other sectors that are participating in the EV ecosystem can be a proxy play on the theme.

In such a scenario, direct investing through a bottom-up stock picking strategy may suit investors better than index investing. In the meantime, for those looking to invest through mutual funds rather than stocks, for a tactical exposure – entering when the auto cycle is looking up and exiting when it is turning unfavourable – actively managed funds may provide a better opportunity.

Currently, there is only one actively managed fund focused predominantly on the auto sector – UTI Transportation and Logistics.

As of November 2021 (latest available info), this fund holds 81 per cent in auto and auto ancillaries.

To provide a perspective, this fund has returned 26 per cent over the last year (regular plan, lumpsum return), beating the Nifty Auto Index.

Published on January 08, 2022

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