Consider auto ETF or index funds for funding your first car or bike
Consider auto ETF or index funds for funding your first car or bike
Buying your first car or bike is a significant milestone, a testament to your hard work and determination. Saving up for months or even years, researching different models, and finally making the decision to invest in a mode of transportation symbolizes freedom and mobility. When the day arrives to drive off in your very own vehicle, the feeling of empowerment is unmatched. It's not just a vehicle; it's a representation of your dedication, perseverance, and ability to achieve your goals. This zeal can also be extended to your investment in the auto sector.
Structural Growth Propellers
The Indian automotive industry presents a lucrative opportunity for investors. The auto sector is a vital component of the economy, with significant contributions to manufacturing GDP and overall economic growth. India's automotive sector boasts numerous original equipment manufacturers and auto component suppliers, making it one of the fastest-growing automotive markets worldwide. As the industry continues to grow, initiatives such as 'Make in India' and the 'National Electric Mobility Mission Plan' stimulate investments, research & development, innovation, and infrastructure enhancements for electric vehicles.
Also, the Indian auto industry has been focussing on deepening localization of advanced components, reducing imports, and capitalizing on multinational companies' 'China Plus One' sourcing strategy. With plans to deepen localization of automatic transmissions, power control units, high-strength steel, and combined charging systems, the industry presents significant growth opportunities for long-term investors.
Ways to Invest
There are multiple ways in which one can take exposure to the auto sector. There are both actively and passively managed auto offerings that one can choose from. Within the passive universe, an investor has the choice between an auto sector based index fund or ETF. Basis one’s portfolio requirement, an investor can choose from among these options.
By investing in any of the passive offerings, i.e. auto sector index fund or ETF, one of the notable advantages is that one gets access to a readymade portfolio which is diversified in nature. Furthermore, it allows investors to capitalize on the growth potential of the automotive industry as a whole, rather than relying on the success of individual companies.
For example: If the underlying index is the Nifty Auto Index, the investment is spread across 15 companies representing various segments of the auto industry, which includes four-wheelers, two-wheelers, auto ancillaries, and tyres. These companies are made a part of the index based on certain eligibility criteria such as market capitalization, liquidity, and sector classification. To keep up with the developments in the automotive industry, the Nifty Auto Index undergoes a semi-annual rebalancing process.
Given this approach, an investor is spared from the daunting task of keeping up with the developments in the sector, companies that are likely to gain from these developments, further research understanding the strength of individual company’s balance sheets, corporate governance standards etc.
As of April 30, 2024, the Nifty Auto TRI has consistently outperformed the Nifty 50 TRI over 1, 3, 5, and 10-year periods. For example, a Rs 1 lakh investment in Nifty Auto TRI a year ago would now be worth Rs 1.71 lakh against 1.26 lakh of Nifty 50 TRI. Extending the timeframe to 10 years, the initial investment of Rs 1 lakh would have grown to Rs 3.80 lakh in Nifty 50 TRI and Rs 4.23 lakh in Nifty Auto TRI respectively.
In conclusion, if you are looking to tap into the growth prospects of the automotive industry while managing risk and maintaining portfolio diversification, an auto index fund or ETF can be a good starting point that too at a very low cost. However, do ensure that the offering fits into the overall equity portfolio allocation. In case if you are unsure of the allocation aspect, do consult a financial advisor.
The author is the Principal- Investment Strategy, ICICI Prudential AMC
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