The answer is Yes!
Investing in India’s manufacturing sector through mutual funds offers a strategic avenue for investors aiming to capitalise on the country’s industrial growth. Sectoral funds, which focus on specific industries, provide targeted exposure to sectors like manufacturing, enabling investors to benefit from sector-specific opportunities.
Introduction to Sectoral Funds
Driven by cyclical trends, with limited diversification, the sectoral funds invest in a particular sector of the economy such as infrastructure, technology, pharmaceuticals manufacturing, or finance.
This focused investment strategy aims to leverage the growth potential within a specific sector. However, due to their concentrated nature, sectoral funds inherently carry higher risk and volatility compared to diversified equity funds.
Key Characteristics of Sectoral Funds
1. Concentrated Exposure
Investments are primarily within a single sector, leading to potential high returns if the sector performs well, but also increased risk if the sector faces downturns.
2. Cyclical Performance
The returns from sectoral funds are closely tied to the economic cycles affecting the specific industry, making them susceptible to market fluctuations.
3. Active Management
Fund managers actively select stocks within the sector, aiming to outperform the sector benchmark through strategic stock selection and timing.
Performance of India’s Manufacturing Sector Post-COVID
The COVID-19 pandemic posed significant challenges to India’s manufacturing sector, leading to disruptions in supply chains, labor shortages, and a decline in production. However, the sector has demonstrated resilience and a robust recovery, influenced by several key factors:
1. Government Initiatives
(a) Production-Linked Incentive (PLI) Scheme
Introduced to boost domestic manufacturing and attract investments in key sectors, the PLI scheme offers financial incentives based on incremental sales.
(b) Make in India and Viksit Bharat
These flagship programs aim to transform India into a global manufacturing hub by encouraging both domestic and foreign companies to produce their goods in India.
2. Shift in Global Supply Chains
(a) Diversification from China
Global companies are re-evaluating their supply chain dependencies on China due to geopolitical tensions and the pandemic’s impact. India has emerged as a viable alternative.
3. Improved Industrial Output
(a) Purchasing Managers’ Index (PMI)
India’s Manufacturing PMI has consistently remained above the 50-mark, indicating expansion.
(b) Index of Industrial Production (IIP)
The IIP data shows a steady rise in manufacturing output, with sectors like pharmaceuticals, electronics, and automotive leading the growth trajectory.
4. Foreign Direct Investment (FDI)
(a) Increased Inflows
The manufacturing sector has witnessed a surge in FDI, driven by policy reforms, ease of doing business, and the strategic advantage of India’s large domestic market.
Challenges and Considerations
(a) Regulatory and Infrastructure Bottlenecks
Despite the positive momentum, challenges persist, including complex regulatory frameworks and infrastructure deficits.
(b) Economic Slowdown Indicators
High inflation, reduced consumer spending, and global economic uncertainties impact growth projections.
Why Invest in India’s Manufacturing Sector?
The manufacturing sector is a cornerstone of India’s economic development, contributing approximately 16-17% to the Gross Domestic Product (GDP) and providing employment to nearly 20% of the workforce. Further, the budget 2025 has given voice to the National Manufacturing Mission for furthering the Make in India by providing policy support, execution roadmaps, governance and monitoring framework through central ministries and states bodies. Investing in this sector offers several compelling advantages:
1. Economic Growth Driver
(a) GDP Contribution
A robust manufacturing sector propels economic growth, enhances export potential, and reduces trade deficits.
(b) Employment Generation
Manufacturing creates job opportunities across various skill levels, contributing to socio-economic development.
2. Policy Support and Reforms
(a) Incentives and Subsidies
Government policies, such as tax incentives, subsidies, and infrastructure development, create a conducive environment for manufacturing enterprises.
(b) Ease of Doing Business
Reforms aimed at simplifying regulations and improving business processes attract both domestic and foreign investments.
3. Demographic Advantage
(a) Young Workforce
India’s demographic dividend offers a large, youthful, and skilled labor pool, which is attractive for manufacturing activities.
(b) Rising Middle Class
An expanding middle class increases domestic consumption, driving demand for manufactured goods.
Top Manufacturing Sector Funds in India
Investors seeking exposure to India’s manufacturing sector can consider sectoral mutual funds that focus on this industry. As per AMFI’s report, the sectoral/thematic category of mutual funds saw the highest inflows during fiscal 2024 at over Rs 46,000 crore, followed by small cap fund category with net inflows of over Rs 40,000 crore even though the category saw marginal outflows. Below are the top 10 sectoral funds based on 1-year and 3-year returns available on Kuvera:
Top 10 Sectoral Funds with 1-Year Returns
| Sr. No. | Fund | 1 yr return | TER | AMC |
|---|---|---|---|---|
| 1 | HDFC Pharma & Healthcare Growth Direct Plan | 21.11% | 0.97 | HDFC Mutual Fund |
| 2 | Whiteoak Capital Pharma & Healthcare Growth Direct Plan | 20.37% | 0.68% | Whiteoak Capital Mutual Fund |
| 3 | IDBI Banking & Financial Services Growth Direct Plan | 18.73% | 1.50% | IDBI Mutual Fund |
| 4 | SBI Technology Opportunities Growth Direct Plan | 16.00% | 0.84% | SBI Mutual Fund |
| 5 | ICICI Prudential Pharma Healthcare & Diagnostics Direct Plan | 15.48% | 1.10% | ICICI Prudential Mutual Fund |
| 6 | DSP Healthcare Growth Direct Plan | 15.25% | 0.58% | DSP Mutual Fund |
| 7 | DSP Banking & Financial Services Growth Direct Plan | 15.18% | 0.71% | DSP Mutual Fund |
| 8 | Kotak Consumption Growth Direct Plan | 15.01% | 0.55% | Kotak Mahindra Mutual Fund |
| 9 | HDFC Technology Growth Direct Plan | 14.43% | 0.98% | HDFC Mutual Fund |
| 10 | Axis Innovation Growth Direct Plan | 14.40% | 1.31% | Axis Mutual Fund |
Source: Kuvera, Feb 26, 2025
Top 10 Sectoral Funds with 3-Year Returns
| Sr. No. | Fund | 3 yr return | TER | AMC |
|---|---|---|---|---|
| 1 | SBI PSU Growth Direct Plan | 33.26% | 0.78% | SBI Mutual Fund |
| 2 | Invesco India PSU Equity Growth Direct Plan | 31.22% | 0.85% | Invesco Mutual Fund |
| 3 | Aditya Birla Sun Life PSU Equity Growth Direct Plan | 31.14% | 0.55% | Aditya Birla Sun Life AMC Ltd. |
| 4 | HDFC Infrastructure Growth Direct Plan | 30.99% | 1.07% | HDFC Mutual Fund |
| 5 | ICICI Prudential Infrastructure Growth Direct Plan | 30.64% | 1.15% | ICICI Prudential Mutual Fund |
| 6 | Nippon India Power & Infra Bonus Bonus Growth Direct Plan | 29.87% | 0.96% | Nippon India Mutual Fund |
| 7 | Franklin Build India Growth Direct Plan | 28.81% | 1.01% | Franklin Templeton |
| 8 | Franklin India Opportunities Growth Direct Plan | 28.34% | 0.53% | Franklin Templeton |
| 9 | DSP India T.i.g.e.r. Growth Direct Plan | 28.13% | 0.83% | DSP Mutual Fund |
| 10 | Quant Quantamental Growth Direct Plan | 27.50% | 0.61% | Quant Multi Asset, Multi Manager |
Source: Kuvera, Feb 26, 2025
Wrapping Up
To wrap up, investing in sectoral funds, especially in India’s manufacturing sector, offers immense growth potential but comes with higher risks. The post COVID recovery, government incentives, and increasing foreign investments make the sector an attractive investment avenue. However, investors must conduct thorough research, consider market cycles, and have a long-term perspective before investing in sectoral funds. With the right approach, manufacturing sector mutual funds can be a valuable addition to an investment portfolio.
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DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.
