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Many investors these days could be confused by the introduction of new age-themed funds, mainly if the theme is related to business, the economy, or manufacturing. Investors must be informed and familiar with the product beforehand, as each is unique.

The Axis India Manufacturing Fund, the most recent offering by Axis mutual fund, is an open-ended equity scheme that will be benchmarked by the Nifty India Manufacturing TRI and represents India’s manufacturing theme.

The NFO, which opens on December 1, 2023, intends to give investors access to the potential of India’s manufacturing sector, which is predicted to expand over the next several years. However, before investing in this thematic fund, investors should understand what they are:

What are manufacturing funds?

A manufacturing Fund is a thematic equity mutual fund that invests 80% to 100% in the equity securities of the companies engaged in manufacturing theme.

The stock holdings of this fund invest in companies ranging from capital goods to consumer durables to textiles, pharmaceuticals, and so on, thereby offering investors a comprehensive avenue to participate in India’s manufacturing success story.

Thematic funds adhere to a particular theme and are typically more diversified than sector-specific funds. The fund managers use a combination of top-down and bottom-up approaches to identify sectors anticipated to benefit from a specific theme.

Fund managers will search for opportunities across market capitalisations to generate potential capital growth over the long term. The manufacturing funds fall under the equity category of mutual funds; hence, they are taxed like equity mutual funds.

How are manufacturing funds different from business cycle funds?

Business cycle funds are the ones that follow business cycles, having few sectors that are expected to do well based on the phase of the economy. It is essential to recognize that sector performance fluctuates across the business cycle.

For instance, the financial sector will do better during the recovery and boom phases, but defensive sectors such as pharmaceuticals and fast-moving consumer goods will likely fare considerably better during the recession and depression phases.

Taxation
Thematic funds are taxed as equity mutual funds. If you redeem before one year, returns are subject to a 15% tax. After a year, you must pay a 10% long-term capital gain tax on returns of Rs. 1 lakh or more in a fiscal year.

Returns

The average return of Manufacturing Mutual Fund as per Ace mutual fund has been 25%,23%, and 16% over 1,3 and 5 years, respectively, as of December 4, 2023.

Should you invest?

As per the IBEF research report, With the help of government initiatives like the National Manufacturing Policy, which aims to raise manufacturing GDP share to 25% by 2025.

Further, the PLI scheme for manufacturing, which was introduced in 2022 to develop the country’s core manufacturing sector in line with international manufacturing standards, India is progressively moving toward Industry 4.0. This bodes well for the investors.

That being said, thematic equity mutual funds have very high risk attached to them. So, only experienced investors who know the sector should invest in such funds. The fund suits investors with an investment horizon of 3 years and above.

Conclusion

For experienced investors, thematic funds are advised, with only 10% of the total portfolio invested in this type of fund. Also, the expense ratio, of sectoral funds can go up as high as 2.25%, it is advisable to compare the expense ratio before investing in such sectoral funds.

Lastly, if an investor is particularly optimistic about the promise of such thematic funds, he can invest with the help of a financial advisor, but only after analysing all of the cons of such thematic funds.