SBI Mutual Fund Attempts To Drive Returns With Automotive Theme

SBI Mutual Fund is launching a first-of-its-kind thematic fund that invests in businesses in the automotive sector and those that are allied with it. The new fund offer to launch the scheme is set to open on Friday and close at the end of the month.

This will be the latest offering in the sectoral/thematic funds category of the mutual fund industry—the fourth largest among actively managed equity mutual funds. At the end of April, this category had assets under management of over Rs 3.13 lakh crore, with themes and sectors as varied as information technology, banking, healthcare and even a defence fund.

Through its SBI Automotive Opportunities Fund, the mutual fund is offering investors focused exposure to companies operating in the automotive business in India, which is currently the fourth largest market for vehicles in the world. "Penetration of 2W and 4W in India per 1000 people is still significantly low as compared to other economies, thereby offering huge headroom for growth in the future," the fund house explains in a brochure.

The thematic fund will benchmark its performance against the Nifty Auto Total Return Index, which has generated a compound annual growth rate of 15.5% over the past 10 years. During that same period, the Nifty 50 has gained 14.3%. As is normally the case with sectors and themes, there are periods of significant outperformance and underperformance. Over the last year, the Nifty Auto TRI gained 71.7%, compared with 26.5% for the Nifty 50 TRI and 39.3% for the Nifty 500 TRI.

A TRI measures the performance of stocks, assuming that all dividends are reinvested.

"The lay investor is better off in a diversified fund. A sectoral or thematic fund can sometimes remain an underperformer for an extended period of time because of the cyclicality of these businesses," Amol Joshi, founder of PlanRupee Investment Services, said.

Harshvardhan Roongta, co-founder of Roongta Securities, echoes this. “Investors are better off investing in diversified funds because many of these have investments in automotive companies too."

Investments in sectoral and thematic funds could net investors outsize gains. In fact, often, the best-performing mutual fund scheme in any given year is usually a sectoral or thematic fund. For example, last year, schemes that focused on infrastructure companies and public sector utilities outperformed.

However, in periods when a sector goes through a lull or a downturn, these themes underperform because of concentration risk. A diversified fund would allow investors to limit their exposure to an underperforming sector.

If an investor still wants to invest in sectoral or thematic funds, they should limit it to 5–10% of their financial investments, Joshi said.