Should You Invest In India’s First Two Auto ICC Traded Funds?

The stocks for the index are selected on the basis of free-float market capitalization of Nifty 500 companies and will be rebalanced semi-annually.

The expense ratio for the scheme from both the fund houses is around 20 basis points or 0.2% per annum.

Should you invest?

After being an outperformer (over Nifty 50) for more than half of the last decade, the Nifty Auto index has underperformed over the past four years due to sluggish consumer demand, threat of electric vehicles and supply-side constraints . ,

With the recovery in the broader market, Nifty Auto Index went up in the last 2 years (though on a lower basis) but still lags behind the performance of Nifty 50. according to note from ICICI Pru MFThe shares of automobile companies are cyclical in nature. Their profits rise and fall with economic cycles – expansion, peak, recession and recovery – as well as consumer confidence.

“The auto sector is already on the verge of a turnaround with the return of normalcy post covid. Valuations are at a discount to the long-term average (4.4x P/B versus 5x the 10-year average) unlike other sectors. Suvjit Ray, Head-Products, IIFL Securities said, “After beating the down-cycle over the past few years, the expected cyclical recovery is expected to significantly improve margins and return ratios.

A report by ICICI Securities also suggests that “rapid vaccination to open workplaces and educational institutions may help in revival of the transport segment (like 3Ws/bus/scooters) in CY22.”

Experts say that investors may have tactical exposure to this sector.

“Auto ETFs can be a part of a well diversified MF portfolio of an investor as a part of passive fund allocation. They can have exposure of up to 10% depending on the strategic approach to the sector and investment horizon,” Ray added.

Not only this, any sector wise investment should be for strategic asset allocation rather than strategic asset allocation purpose, said Rishabh Desai, founder, Rupee with Rushabh Investment Services.

Santosh Joseph, Founder and Managing Partner, Germinate Investor Services LLP said that an investor should be fully aware of why they are buying this idea. “Auto mobility remains a subset of the sector. There is reason to believe that mobility in the domestic market has a future.”