Nippon India Mutual Fund and ICICI Prudential have launched India’s first auto exchange-traded fund. Both Auto ETFs are an open-ended scheme, that will track the Nifty Auto Index. It has 15 stocks of companies making vehicles, tyres, batteries and other parts. In this index, one stock can weigh a maximum of 33 percent. Nippon’s Fund Offer (NFO) is now open and will be closed on 14 January 2022. Whereas, the ICICI’s fund will close on January 10. For investment in these funds minimum amount would be Rs 1,000. If investors want to invest more, they can buy multiple units.
Current economic scenario for the auto sector:
After taking a bad hit from the pandemic, the auto sector is coming out of the woods. The sector is showing a strong recovery due to macro activities and the opening up of the economy. The uptick in consumer demand is driving this sector up. Through these ETFs, investors will be able to invest in the emerging segment of the Indian Automobile Industry.
Why auto ETF?
India is an emerging global hub for auto components. Moreover, electric mobility is also gaining ground with the support of the government. This sector has the potential for good performance in future. Auto space, being a cyclical sector, follows all the phases of the economic cycle.
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If we look at the trends, the profits of the auto industry are continuously increasing. There are certain factors that are good for this. With the increasing purchasing power of the people, more and more people will opt for a private vehicle. Besides, in India labour available at low wages is also in favour of this sector. Along with this, the policies of the government are also giving impetus to the auto industry.
There is an investment of $ 31 billion in the research and development of autos all over the world. India accounts for about 40% of this. At present, orders for about 2 lakh vehicles are currently in line.
Some concerns:
- These ETFs, being sector-specific, become much riskier than mixed funds. If a single sector gets the heat whole investment will see a steep fall.
- Moreover, many existing companies are not yet ready for future electric mobility.
- The cutting throat competition in this sector results in very slim profit margins for makers.
- These will be almost inactively managed funds and are not a very prudent choice for long term and a big investment.
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