AssetPlus NFO Review: ICICI Prudential Nifty Auto Index Fund

by Maheswaran Hariharan

ICICI Prudential AMC has launched an NFO, which is open for subscription from Sept 22nd, 2022, and closes on October 6th, 2022.

Investment Objective: To generate wealth over the long term, suitable for investors having a high to very high-risk appetite who are comfortable with volatility for prolonged periods.

Investment Strategy: As the name suggests, the fund will adopt a passive approach by investing directly in the index that has the premier automobile stocks in the country. The fund follows an approach that emphasizes the various opportunities present in the automobile segment and aims to replicate the index, expected to participate in the growth of this particular sector.  

Fund Manager: Kayzad Eghlim and Nishit Patel

Benchmark: Nifty Auto TRI

Fund Management Process:

  1. The Selection criterion is purely based on the existing stock constitution of the Nifty Auto Index.
  2. The Fund will replicate the Index based on the free-float market capitalization.
  3. Any changes in the benchmark(Nifty Auto TRI) will automatically reflect in the fund.
  4. No single stock can exceed 33% of the portfolio, and the top-3 stocks of the portfolio cumulatively cannot exceed 62%The portfolio is rebalanced semi-annually, typically during September and March.

Opportunity:

The Auto Sector is deeply cyclical. It moves differently and is highly volatile compared to a diversified Index like Nifty 50 or Nifty 500. Since August 2018, and more so after the outbreak of Covid-19, the Auto sector has faced huge losses. Its performance has been dismal, but the last six months have shown that there has been an uptick in the overall growth trajectory, which might signal a long-term revival for this sector.

Nifty Auto vs Nifty 50 in the last 10 years. Source: ICICI AMC

Multiple factors that are aiding the possible boom in Auto Sector in India:

  1. Population and Income - Young working population with increased individual income leads to higher consumption levels.
  2. Labour - Abundance in the labor market with skill enrichment coming at a low cost.
  3. Research - India accounts for 40% of the $31 Billion of Global Engineering and R&D expenditure.
  4. Rise of EV - The EV boom is expected to boost the sales of the Auto Sector in the coming years.
  5. Government Initiatives - Atmanirbhar Bharat Abhiyaan focuses on special incentives and packages for promoting Auto Manufacturing.

Based on our analysis, we have observed the following pros and cons:

Pros:

  1. No fund manager bias or human intervention at any point in time.
  2. Focus is on top auto companies in India like Mahindra & Mahindra, Bajaj Auto, Maruti, Tata Motors, etc, that form a core part in contributing to the growth of the sector and economy as a whole.
  3. Since it mirrors the index, the cost is very low.
  4. No exit load applicable at the time of redemption.
  5. Niche investing approach that focuses purely on the Auto sector boom.

Cons:

  1. Lack of diversification due to concentration in one sector(Auto).
  2. Susceptible interim periods of underperformance when compared to broader indices like Nifty 50.
  3. Extremely cyclical in nature, making it more volatile.
  4. The weightage of each stock is directly linked to the index. It cannot be actively modified based on market movements.
  5. No scope for active fund management, like taking cash calls during market fluctuations.

The Auto Sector is an integral part of the Indian Stock market as well as the economy of our nation. It currently contributes around 7% to the country's GDP. It is also expected to play a significant role in the EV revolution. Increased demand and positive macroeconomic factors can propel the sector to new heights. However, at the same time, it is highly cyclical. It can lead to severe underperformance in the short run with a lack of active fund management to intervene.

It is of utmost importance that the fund is discussed with your financial expert and then ascertain whether it is suitable to invest in. Always read the scheme documents thoroughly before investing.