A boom in car sales. Should you invest in transport sector mutual funds?

What is included in transportation?

Let us first discuss the transport sector. This includes manufacturers of all vehicles such as two wheelers, three wheelers, tractors, passenger vehicles and commercial vehicles. This also includes all their suppliers.

Viewed from the top, a car seems to be a single product, but did you know that a car has about 30,000 parts, counting each part down to the tiniest of screws, nuts and bolts. Some of these parts are made by the manufacturer themselves, but there are many other parts for which the industry relies on the suppliers who make many of these parts. The 30,000 or so parts use different raw materials and different manufacturing processes.

So all the manufacturers of automobiles and their supply of parts constitute the transport sector.

What is covered under Logistics?

The new logistics policy unveiled by the government has put the logistics sector in the limelight. It includes all those industries which move goods from a producer to its final consumer. So the entire supply chain, rail, shipping companies, delivery and courier companies are part of the logistics sector.

Should you invest in these funds?

Passenger vehicle sales have registered an unprecedented growth in recent months. There are many reasons that have kept the demand for vehicles increasing over the years.

Owning a vehicle which was considered as a luxury in the olden days has now become a must for commuting in cities and towns, especially in smaller places where public transport system is not robust. Demand has been further fueled by population growth, migration and rapid urbanization. The rise in consumerism is another reason for the increasing demand for two wheelers and three wheelers.

The demand has been further helped by increased ability to service debt due to easy availability of finance to buy vehicles as well as increase in disposable income, especially in millennials. As India moves from a developing country to a developed country, vehicle ownership per capita will catch on sooner than later.

In addition, the promotion of electric vehicle to reduce dependence on fossil fuels will lead to a huge change in demand and demand for electric automobiles and auto ancillary products.

The logistics sector is also gaining importance of late as people switch to brick and mortar mode for online shopping. Improvements in communication facilities, especially the expansion of internet facilities, have opened many avenues for e-commerce. The flourishing of e-commerce is a major booster for the logistics sector. The sector is moving from being a predominantly organized sector to an organized one with a list of more logistics companies. It provides more investment opportunities. The recently announced New Logistics Policy (NLP) by the government highlights the importance of this sector and the government’s support to this sector. With the increase in infrastructure for the logistics sectors under NLP, the cost of logistics companies will come down in future thereby increasing their profitability.

The transportation and logistics sector will do well in the future due to the multi-year growth opportunities in the mobility services sector.

investment opportunities available

Since you cannot invest, do enough research to find out the potential companies in these sectors, you can invest in them through mutual fund schemes. UTI Transport & Logistics Fund is in existence for more than 15 years which was launched on 01 Aug 2005. Joining the same segment are IDFC Transportation & Logistics Fund and ICICI Prudential Transportation & Logistics Fund which are currently open. UTI Transportation and Logistics Fund has performed well in the past. Despite there being a quiet period for the private car segment since its inception, it has given returns of around 15% on a yearly basis.

Risks associated with investing in thematic funds

Investment in the transportation and logistics sector is thematic in nature and thus carries with it high risk associated with investing in thematic funds. Thematic investments result in higher returns in some years and may give sub-optimal returns during other years when the thematic market is not trending. So if you have a high risk appetite then you should invest in such thematic funds. Since it is a long term themed product, those who have a minimum tenure of 5 years should invest in it.

Tax treatment of gains on this fund

These funds primarily invest in Indian equities, they qualify as equity oriented schemes under tax laws and any gains made for investments of 12 months or more are treated as long-term capital gains. and taxed at a flat rate of 10% after one’s initial tax free profit. Lakh. Gains on investments held for less than 12 months are treated as short-term capital gains and taxed at the same rate of 15%.

Balwant Jain is a tax and investment specialist and can be reached on Twitter at jainbalwant@gmail.com and @jainbalwant.