Is it the right time to invest in auto sector mutual funds as auto stocks have corrected heavily in recent times? Also, should one do lump-sum investments or SIPs? If through SIPs, how long should they be run?
SK Sharma
Currently, there is only one fund predominantly focussed on auto — UTI Transportation and Logistics. Going by its latest portfolio, 76 per cent of the fund’s holdings (as of July 2019) are in the auto and auto ancillary space, the rest being from related areas such as shipping, aviation and other miscellaneous segments.
Thanks to new vehicle sales volumes plunging, many stocks in the auto and auto ancillary sectors have corrected heavily in recent times. For instance, since January, out of about 133 listed stocks, 100 have lost more than 20 per cent, and about 25 stocks have dropped over 50 per cent. Lump-sum investments in UTI Transportation and Logistics have seen nearly 30 per cent erosion in NAV in the last one year. SIPs have fared no better, sporting 25 per cent erosion in value over the past year.
Is it the right time to invest in this thematic fund? One can never really predict the bottom for the markets; more pain may be in store. While the government has announced various measures to help improve demand for vehicles, it may take sometime before auto sales volumes revive.
The introduction of GST has led to quicker turnaround times for trucks, and the revision of axle load norms for commercial vehicles has added to the freight capacity of existing vehicles.
Unless the economy heats up, and infrastructure spends and consumer demand improves substantially, commercial vehicle sales may not move up sharply.
Cheaper loans, good monsoon and GST rate cuts, if it comes by, might help improve car and two-wheeler sales. In a scenario of job losses, return of consumer confidence will be key to bettering demand for personal vehicles.
That said, the sharp correction in stock prices indicates that it is not a bad time to invest in auto or auto ancillary stocks now. Auto sales typically follow a cyclical pattern and we are in the heart of a cyclical downturn right now. New vehicle sales volumes, which grew at 14.2 per cent in 2017-18 (year-on-year), came down to 5.2 per cent in 2018-19, and has plunged 14 per cent so far this fiscal.
Remember that when it comes to thematic funds such as this, timing your exit is as important as timing your entry. To preserve your gains, you need to keep a close watch on the developments in the auto industry and exit the fund as the cycle peaks out. Thus, investing in thematic funds is a high risk-high returns proposition and if you do not have the appetite for it, you should stick to diversified equity funds.
It would be better to invest lump sums in thematic funds so that you can give your investments enough time to gain from the bottom. However, as figuring out the bottom is a tricky proposition, you can probably divide your lump sum into 2-3 chunks and invest in a phased manner.
I am 44 years old and work as a private tutor. I have been investing in the following mutual funds: ₹2,000 each in ICICI Prudential Value Discovery, Aditya Birla Sun Life Frontline Equity, HDFC Top 100 from April 2017, and ₹2,000 in SBI Magnum Multiplier since August 2018. My time horizon is 10 years and above. My risk profile is moderate. Do I need to change my portfolio or add funds?
Subhojit Chakraborty
You currently invest ₹4,000 in low-risk large-cap funds (ABSL Frontline Equity and HDFC Top 100) and ₹2000 each in a medium-risk large- and mid-cap fund (SBI Magnum Multiplier now known as SBI Large and Midcap) and a value fund (ICICI Pru Discovery). This allocation suits your moderate risk appetite. As of now, your SIPs begun in April 2017 sport returns of between minus 2.5 per cent and 1.6 per cent (assuming you began investing on April 1, 2017). SBI Large and Midcap SIPs have returned minus 7.1 per cent (assuming first investment on August 1, 2018).
However, these funds have a good long-term performance track record and you can continue investing in them for the time being. Your time-frame of 10 years gives enough time for equity funds to tide over market cycles and give good returns. But remember to review your portfolio regularly and take corrective action if necessary.
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