From Assembly Lines To Bottom Lines: Embrace Growth With Manufacturing Themed Funds By Shashank Jain,Founder, Balaji Investments

India had been making significant efforts to boost its manufacturing sector as part of its broader economic development strategies. Along with steps taken by corporates, the Indian government had launched several initiatives and campaigns to encourage and promote manufacturing in the country. In this backdrop, thematic mutual funds based on manufacturing in India are a good opportunity. Since the manufacturing sector accounts for  over 15-17% of India's GDP, it is important to take a fair exposure of investment opportunities in this space through a focussed fund. Here is what you must keep in mind. 

Why invest 

Export earnings: Many manufacturing industries in India were export-oriented, contributing to the country's foreign exchange earnings. Industries like pharmaceuticals, textiles, and automotive components are among the top contributors to India's export revenues. 

Growth potential: India's manufacturing sector had significant growth potential due to factors such as a large and young population, a growing middle class, increasing urbanisation, and a favourable business environment. 

Despite its potential, the manufacturing sector in India faced challenges like infrastructure bottlenecks, complex regulatory environment, access to credit, and skilled labour shortages. Both the domestic manufacturing sector and the government are addressing these challenges to unlock the full potential of the manufacturing sector. 

Measures adopted 

The following measures have been taken to pump prime India's manufacturing sector.  

Make in India: Launched in 2014, this campaign aims to transform India into a global manufacturing hub by encouraging both domestic and foreign companies to manufacture their products within the country.  

National Manufacturing Policy (NMP): This aims to increase the contribution of the manufacturing sector to the Indian economy, create jobs, and promote sustainable growth.  

Atmanirbhar Bharat: Launched in 2020 in response to the COVID-19 pandemic, the Self-Reliant India initiative aims to reduce India's dependence on imports and promote indigenous manufacturing and production of goods. 

Production Linked Incentive (PLI): The government introduced the PLI scheme to provide financial incentives to manufacturers in various sectors. Government’s PLI schemes that cover 13 sectors may bring Rs 4.79 trillion investments over the life of the schemes (at least five years). 

Skill development: Efforts were made to enhance the skill set of the Indian workforce to cater to the needs of the manufacturing sector, particularly in high-tech and advanced industries. 

Play with manufacturing funds 

Thematic mutual funds focusing on manufacturing invest predominantly in companies that are involved in manufacturing goods and products. These companies could be from various industries such as automobiles, chemicals, engineering, textiles, consumer durables, and more. 

The performance of these funds is closely tied to the performance of the manufacturing sector and is positively influenced by factors boosting the industry. Thematic manufacturing funds offer the potential for higher returns during bullish periods. They are more suitable for investors who have a higher risk appetite and a strong belief in the growth prospects of the manufacturing sector in India.  

Returns and strategy 

Manufacturing linked stocks have had a good run. In the 1 year ended June 2023, Nifty India Manufacturing India has clocked 27 per cent gains, outperforming the broader market. For a long period such as 5 years, the manufacturing basket of stocks has generated 13.5 per cent CAGR. 

Good manufacturing funds endeavour to take exposure into diverse sectors of manufacturing. They are market cap and sector agnostic viz. retain the flexibility to invest across market caps. Also, the schemes may take aggressive sectoral positions based on sub-themes such as Exports oriented manufacturing, Domestic consumption and Domestic capex manufacturing.  

Typical sectoral exposures are in spaces such as Automobile and Auto Components, Capital Goods, Healthcare, Metals & Mining, Chemicals, Oil, Gas & Consumable Fuels, Consumer Durables, and Textiles. A good fund option is Rs 900-crore ICICI Prudential Manufacturing Fund, which has generated over 30% plus CAGR return in 3 years, over 600 basis points more than BSE-500 index. 

As explained before, the manufacturing segment has potential to become the next growth driver for India, backed by strong government initiatives like PLI and Make in India. This creates a strong revenue and demand environment for potential emerging segments like Electric vehicles, Electronics, Battery Tech, Defense etc. Apart from the main mandate, investors in well-run manufacturing funds can hope to achieve diversification against funds which are tilted towards services and the consumption sector. 

Ends