Is now a good time to invest in Auto Sector Fund of India?

After being an outperformer (over Nifty 50) for more than half of the last decade, the index has been underperforming for almost four years since the beginning of 2018.

The index has seen a growth of 177% since its bottom out in March 2020. To put this in perspective, during the same period, Nifty 50 and Nifty 500—which represent broad market indices—moved up 102% and 111%, respectively.

Experts and recent research reports paint a positive outlook for the sector in the near future as well.

Vineet Bagri, Managing Partner, TrustPlutus, said, “Despite the recent surge, “the underperformance over the last five-year period is stark – while the Auto index is up just 13% in absolute terms, the Nifty 50 index has delivered around 62% returns.” Property.

On the valuation front too, the auto sector looks fair. Saji John, Senior Research Analyst, Geojit Financial Services, said, “On a year ahead basis, Nifty Auto Index is trading in line with its 3-year historical average.

However, Outlook is not devoid of any risks. A recent report by Emkay Research on the sector sums up their positive outlook on the sector – with major downside risks along with expectations of a cyclical uptrend over the next three years. “This includes continuation of supply issues, weak global/domestic macro, further rise in commodity prices and unfavorable currency movement.”

According to experts, a savvy investor with high risk appetite can consider investing in this sector.

Vishal Dhawan, Founder and CEO, Plan Ahead Wealth Advisors said, “An aggressive investor with the ability to exit prematurely can consider a strategic allocation for the sector and that too with more than 5-10% of the portfolio. No.” ,

Tactical or strategic allocation involves taking active entry and exit calls based on prevailing market conditions to improve the risk-adjusted returns of the overall portfolio.

There are three funds focusing on the automobile sector in India – Nippon India’s Auto ETF and ICICI Pru Mutual Fund – copying/tracking the Nifty Auto Index. Both these ETFs were launched at the beginning of the calendar year 2022.

There is also an actively managed sectoral fund-UTI Transportation & Logistics Fund with meaningful exposure in the Automobile and Auto Components Sector (77% as on 30 June 2022).

Despite the recent bullishness witnessed by the sector, experts would tell you to stay away from it if you feel that you may not time the exit well and cannot cope with the volatility that comes with sectoral funds. Huh. “The exit timing is where the challenge comes with investing in sectoral funds and not many retail investors will be able to do that,” said Dhawan.

Agreeing with this, Santosh Joseph, Founder and Managing Partner, Germinate Investor Services, LLP, said, “The auto sector is very cyclical. Instead of taking a call on the sector and exiting at a later time, retail investors would be better off investing in a diversified mutual fund, where the fund manager decides whether they need to be overweight or underweight on the sector.

Moreover, strategic calls may not make much sense for small investors with a few lakh rupees to invest, believes Joseph. “Even though the call works out to better returns, tactical allocation, which accounts for only a small portion of one’s portfolio, may not add anything significant to the overall return,” he said.

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