Is it time now to spend money on India’s auto sector funds?

The auto sector, it appears, is on a roll now. Easing supply-side constraints, a pick-up in demand, and a fall in crude oil and metallic costs— leading to decrease enter prices—have all labored in auto producers’ favour. It’s no marvel then that the Nifty Auto Index hit an all-time excessive just a few days in the past.

The index, after being an outperformer (over the Nifty 50) for greater than half of the final decade, underperformed for nearly 4 years because the starting of 2018.

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Auto sector in focus

Since bottoming out in March 2020, the index has witnessed a progress of 177% up to now. To put this in perspective, throughout the identical interval, the Nifty 50 and the Nifty 500— representing broader market indices—went up by 102% and 111%, respectively.

Experts, and up to date analysis stories, have painted a constructive outlook for the sector within the close to future as properly.

Despite the latest buoyancy, “the underperformance within the final five-year interval is stark – whereas the auto index is up simply 13% in absolute phrases, the Nifty 50 index has returned about 62%,” said Vineet Bagri, managing partner- TrustPlutus Wealth.

Even on the valuation front, the auto sector looks reasonable. “On a one-year forward basis, the Nifty Auto index is largely trading in line with its 3-year historical average,” mentioned Saji John, senior analysis analyst at Geojit monetary providers.

However, the outlook isn’t devoid of any dangers. A latest report from Emkay Research on the sector acknowledged their constructive view on the sector—underpinned by expectations of a cyclical upturn over the subsequent three years—together with key draw back dangers. “It consists of the continuation of provide points, weak world/home macros, additional enhance in commodity costs and antagonistic forex actions.”

A savvy investor with a high-risk appetite can consider taking exposure to the sector, according to experts.

“An aggressive investor who has the ability to time the exit well can consider having a tactical allocation to the sector and that too, not more than 5-10% of the portfolio,” mentioned Vishal Dhawan, founder & CEO of Plan Ahead Wealth Advisors.

Tactical or strategic allocations includes taking energetic entry and exit calls primarily based on prevalent market circumstances to enhance the risk-adjusted returns of the general portfolio.

There are three funds centered on the car sector in India—Auto ETFs from Nippon India and ICICI Pru Mutual Fund—replicating/ monitoring the Nifty Auto Index. These two ETFs have been launched at first of calendar 12 months 2022.

There’s additionally an actively managed sectoral fund—UTI Transportation & Logistics Fund—with significant publicity to the vehicles and auto parts sector (77%, as on 30 June 2022).

Despite the latest uptick witnessed by the sector, specialists would ask you to remain from it if you happen to assume you can not time the exit properly and can’t stand up to the volatility that comes with sectoral funds. “Timing the exit is the place the problem comes with investing in sectoral funds and lots of retail buyers will be unable to try this,” added Dhawan.

Agreeing with this, Santosh Joseph, founder and managing partner, Germinate Investor Services, LLP, said, “auto sector is very cyclical. Instead of taking a call on the sector and later timing the exit, retail investors will be better off investing in a diversified mutual fund, where the fund manager decides if they have to go overweight or underweight on the sector.”

Also, tactical calls don’t matter a lot for small buyers with just a few lakhs of rupees for investments, believes Joseph. “Even if the decision works with superior returns, the tactical allocation, which accounts for under a small portion of 1’s portfolio, might not add something vital to total returns,” he added.

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