What are manufacturing mutual funds and who are they suitable for?

The manufacturing sector plays an important role in economic growth and employment generation. With countries like India seeking to position themselves as global manufacturing hubs, manufacturing mutual funds have gained recognition among investors. These funds can offer investors the opportunity to benefit from this sector's growth potential.

Read on to learn more about manufacturing funds meaning, their advantages, risks, and how to invest in them effectively. Learn about how manufacturing sector mutual funds and thematic manufacturing mutual funds seek to leverage the growth opportunities in these industries.

Table of contents

What is a manufacturing mutual fund?
What is covered under the manufacturing theme?
Advantages of investing in manufacturing mutual funds
Who should invest in manufacturing sector mutual funds?
What are the risks of investing in manufacturing funds?
How to invest in manufacturing funds?

What is a manufacturing mutual fund?

Manufacturing mutual funds can be sectoral or thematic equity mutual funds. Sectoral funds are those that invest predominantly in a particular sector. Thematic funds are those that can invest in companies, stocks or sectors following a particular theme. So, a manufacturing fund meaning is a fund that can invest in companies within or allied to the manufacturing sector, which could include construction materials, automobiles, metals, and much more.

These funds aim to generate potential returns by leveraging the cyclical and structural growth opportunities within the manufacturing industry.

What is covered under the manufacturing theme?

The manufacturing theme encompasses a broad range of industries involved in producing raw materials, intermediate goods, and finished products. Key sectors include the following.

Basic materials: Companies produce essential raw materials like steel, cement, and metals.
Chemicals: Industrial and consumer chemical manufacturers.
Industrial machinery: Producers of equipment used across industries.
Automotive and transportation equipment: Vehicle manufacturers and component suppliers.
Electronics and electrical equipment: Firms involved in consumer electronics or industrial electrical components.
Pharmaceuticals and biotechnology: Drug manufacturers and biotech innovators.
Construction materials: Companies produce materials used in infrastructure projects.
Aerospace and defense: Manufacturers of aircraft, defense equipment, and related components.

Advantages of investing in manufacturing mutual funds

Investing in manufacturing mutual funds can offer the following benefits.

The manufacturing sector can offer significant growth potential, especially during a time of economic expansion and growth. Investing in thematic manufacturing mutual funds allows investors to align with this trend. In India, government initiatives like 'Make in India' and incentives for local production are set to further drive growth. Sectors like electronics or renewable energy are also experiencing significant growth.

Who should invest in manufacturing sector mutual funds?

Manufacturing sector mutual funds can be suitable for the following investors:

Risk-tolerant investors: Given their focus on a single theme, these funds are not as widely diversified as broad market funds. Thus, they can face the risk of sector-specific downturns and volatility.
Long-term investors: The cyclical nature of the manufacturing industry means that investors should have a horizon of 5-7 years or more to realise potential gains.
Those with industry knowledge: Investors who believe in the long-term potential of specific themes like industrialisation or technological innovation may find these funds appealing.
Tactical allocation seekers: Investors seeking exposure to a growing sector.

What are the risks of investing in manufacturing funds?

Cyclicality risk: Many sectors within the manufacturing theme can be highly cyclical, potentially performing well during economic booms and underperforming during recessions.
Concentration risk: As thematic funds focus on a single theme or sector, they are more exposed to unsystematic risks like regulatory changes or technological disruptions, along with other broader systematic risks that can affect the economy and markets as a whole.
Market volatility: Being equity-based investments, these funds are subject to market fluctuations that can significantly impact short-term performance.

How to invest in manufacturing funds?

Research available funds
Study the portfolio composition, company’s credentials, fund manager expertise and the scheme’s expense ratio.
Assess your risk appetite
Determine whether you can handle the inherent volatility associated with thematic investments.
Choose between SIP or lump sum
Systematic Investment Plans (SIPs) allow you to invest small amounts regularly while mitigating market timing risks. Lumpsum, meanwhile, is a large one-time investment, which can be suitable for a cyclical sector.
Select an investment platform
Invest directly through the Asset Management Company or through a distributor. You can also invest through an aggregator platform.
- Short-term capital gains tax: Levied on units held for less than a year; tax rate is 20%
- Long-term capital gains tax: Levied on units held for more than a year; tax rate is 12.5%. Additionally, gains of up to Rs. 1.25 lakh are tax-exempt.

Conclusion

India's manufacturing industry can present an opportunity for investors seeking long-term growth potential through thematic investments. Investing in manufacturing sector mutual funds can helps you access companies driving industrialisation and innovation across various sub-sectors. However, it is prudent to assess one’s objectives and risk appetite before investing in these funds.

FAQs:

How long should I stay invested in a thematic mutual fund?

Investors should ideally stay invested for at least 5-7 years when considering thematic mutual funds like those focused on manufacturing. This allows time for market cycles to play out and optimises the return potential from long-term structural trends.

How manufacturing fund works?

Manufacturing mutual funds pool investor money to invest primarily in companies within the manufacturing sector/theme. Fund managers select stocks based on growth potential within this theme.

Are thematic mutual funds high risk?

Yes, thematic manufacturing mutual funds and other thematic/sectoral funds are considered high risk due to their concentrated exposure to specific sectors or themes. However, they also offer a higher return potential if the underlying theme performs well over time.

What are the taxes on thematic infrastructure mutual funds?

Thematic funds are equity-oriented, so they are taxed like equity funds. Capital gains (the difference between purchase price and sale price of the redeemed units) are subject to taxation. The rate depends upon the holding period and is as follows:

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.