Weekly Musings – NFO Pick (Invesco India Manufacturing Fund)

18 Jul 2024 , 11:52 AM

MANUFACTURING TRIGGERED HIGH GROWTH IN ASIAN TIGERS

One of the highlights of a manufacturing driven economy is that it is synonymous with high growth. This is true of most of the Asian Tigers, which saw their best years between the 1960s and the 1980s. Here are 4 examples.

• Let us start with South Korea. The economy experienced 10.42% CAGR GDP growth between 1981 and 1988. During this period, the share of manufacturing in GDP went up from 21.83% to 27.60%.
• Let us turn to Thailand. The economy experienced 9.4% CAGR GDP growth between 1985 and 1990. During this period, the share of manufacturing in GDP went up from 21.9% to 27.20%.
• The other striking example is Indonesia. The economy experienced 6.81% CAGR GDP growth between 1986 and 1996. During this period, the share of manufacturing in GDP went up from 16.8% to 25.6%.
• We finally look at the most recent story of Vietnam. The economy experienced 6.1% CAGR GDP growth between 2010 and 2022. During this period, the share of manufacturing in GDP went up from 17.1% to 24.8%.

The moral of the story is that Indian manufacturing is still way below the quarter-point. Rising share of manufacturing and GDP growth are mutually symbiotic. Both appear to positively influence the other, which is what the fund is targeting.

INDIAN MANUFACTURING – BIG, AND GETTING BIGGER

Why does India find itself in a sweet spot with respect to manufacturing? There are statistical indications to this trend and the growing Indian domestic market and the positive tilt of government policy make it a classic recipe. After manufacturing lagged the overall GVA (gross value added) for almost 8 years, the situation has changed in the last 2 years. Today, nominal GVA and the manufacturing GVA are both in the range of 8.0% to 8.5%. However, the negative cost inflation in manufacturing in the last 3 years have ensured that in real terms, the manufacturing GVA is 264 bps higher than the real GVA overall. Currently, manufacturing has a share of 14.2% in the overall GVA, which is expected to grow to 21% share for manufacturing by the year 2034. Even in absolute terms, the manufacturing GVA is expected to grow from $459 Billion in FY24 to $1,657 Billion in FY34 (estimated). But, what makes India a preferred manufacturing destination?

India offers huge manufacturing potential. There is a vast domestic market, there is scope to build economies of scale and the export potential is also substantial. Secondly, India has a competitive advantage over other developing nations in terms of land costs, low labour and energy costs, easy access to capital and an army of young and hungry entrepreneurs willing to take on risk for big growth in the future. But, above all, the one factor that has really made a difference is the unstinting government support. The government has brought out schemes like the PLI scheme which are not only intended to make projects viable but also to boost productivity. The government has also taken big steps to expand addressable market, one of the most popular being the slew of free trade agreements (FTAs) to boost exports.

HOW WILL THE INVESCO INDIA MANUFACTURING FUND OPERATE?

Here are some thing s to know about the Invesco India Manufacturing Fund.

• The investment framework of Invesco India Fund has identified 269 stocks of which around 146 belong to the manufacturing universe. Out of these, the fund is likely to use a bottom-up approach to distil its portfolio holdings to about 50-60 stocks.
• Out of the 146 stocks in the manufacturing universe, 33 are large caps, 48 are mid-caps and 65 are small caps, so it is an eclectic multi-cap. In terms of sectoral mix, the industry dominance comes from consumer discretionary, materials and industrials; followed by healthcare, consumers staples, energy, and IT.
• The Nifty Indian Manufacturing TRI Index, has outperformed Nifty 500 TRI across various time periods. Over a 1-year period, the Manufacturing TRI has outperformed by over 21 percentage points, over 3 years, it outperformed by 690 bps, over 5 years it outperformed by 700 bps. However, over a 20 year period, the Manufacturing did just about 110 bps better than the Nifty 500. Clearly, the manufacturing thrust has been back-ended and most of the growth has come only in the last few years.

To sum up, manufacture is expected to coincide with a thrust to manufacturing and higher consumption levels. It will also bring about a much needed shift away from agriculture and reduce the dependence on imports. That is an important factor for Manufacturing Funds.

PERFORMANCE OF MANUFACTURING FUNDS IN INDIA

Here is a quick look at how the Manufacturing Funds have performed over 1-year, 3-Year and 5-Year periods. Effectively, we have taken a short term, medium term, and a long-term view, although the table below is ranked on 5-year returns to give a fair picture. In all cases, we considered Direct Plans, to avoid impact of fund costs. Here are the 22 manufacturing Funds in India managing a total corpus of ₹59,327 Crore. From the thematic funds, we have considered manufacturing and infrastructure funds as a reasonable proxy.

Scheme Name	Return (%) 1-Year	Return (%) 3-Years	Return (%) 5-Years	Daily AUM (₹ in Crore)
Quant Infrastructure Fund	47.64	81.73	38.16	39.22
Invesco India Infrastructure Fund	81.35	82.77	36.26	33.94
Kotak Manufacture in India Fund	20.04	55.84	33.63	33.63
Bank of India Manufacturing Fund	66.96	67.74	32.15	32.57
Bandhan Infrastructure Fund	65.27	90.02	36.98	32.05
Nippon India Power & Infra Fund	406.52	81.84	40.02	31.52
ICICI Prudential Infrastructure Fund	209.95	68.93	40.39	31.18
Canara Robeco Infrastructure Fund	183.62	75.57	36.47	31.06
DSP T.I.G.E.R. Fund	367.62	79.87	38.42	30.85
LIC MF Infrastructure Fund	58.54	89.78	40.15	30.47
Kotak Infra and Economic Reform Fund	83.52	64.90	37.64	30.42
Tata Infrastructure Fund	216.56	72.46	36.36	30.17
ICICI Prudential Manufacturing Fund	38.49	68.46	32.89	29.80
Franklin Build India Fund	166.43	77.36	36.61	29.45
SBI Infrastructure Fund	57.30	67.22	33.88	28.75
HSBC Infrastructure Fund	57.61	70.82	35.74	28.66
Aditya Birla Sun Life Infrastructure Fund	110.69	61.36	30.06	27.62
HDFC Infrastructure Fund	54.19	75.02	38.50	25.53
Sundaram Infra Advantage Fund	104.28	62.79	29.01	25.42
Taurus Infrastructure Fund	76.61	61.36	25.25	25.16
UTI Infrastructure Fund	156.79	60.02	27.71	22.97
ABSL Manufacturing Equity Fund	35.30	49.84	19.19	22.22

Data Source: AMFI

The table above provides the performance of Manufacturing Funds in India, over 1-year, 3-Year and 5-Year time frame. Manufacturing Funds are thematic equity funds, maintaining minimum allocation of 80% exposure to equities. Fund managers have the discretion of allocation as long as it adheres to the manufacturing theme. Here is a sneak peek at the top performers.

• Let us first look at the returns on Manufacturing Funds over a 1-year period. On a 1-year returns basis, these Manufacturing Funds  generated maximum returns of 90.02% and minimum returns of 49.84%, which is fairly impressive in terms of low dispersion and attractive returns even in a worst-case scenario. The average returns over a 1 year period are 71.17%, which is very impressive. The manufacturing theme has done very well in the last 4-5 years and that is evident in the impact it has on the returns.
• Let us now turn to the returns on Manufacturing Funds over a 3-year period. On a 3-year returns basis, these Manufacturing Funds  generated maximum returns of 40.39% and minimum returns of 19.19%, which is once again impressive in terms of low dispersion and attractive returns even in a worst-case scenario. The average returns over a 3-year period are 34.34%, which is fairly impressive. The manufacturing theme has done very well in the last 4-5 years and that is evident in the way the Manufacturing TRI index has managed to beat the Nifty in terms of risk-adjusted returns.
• Let us finally focus on the returns on Manufacturing Funds over a 5-year period. On a 5-year returns basis, these Manufacturing Funds  generated maximum returns of 39.22% and minimum returns of 22.22%, which is fairly impressive in terms of low dispersion and attractive returns even in a worst-case scenario. The average returns over a 5-year period are 29.67%, which is very impressive. The manufacturing theme has done very well in the last 4-5 years and that is clear in the performance of these funds.

Manufacturing as a theme has important implications for India. It will allow other countries to look at India as an alternative factory to the world. Secondly, it will be critical in enhancing the per capita income of the economy, considering that the productivity of labour in manufacturing is nearly thrice that of the labour in agriculture. But, the most important takeaway is that the manufacturing theme appears to be in a sweet spot and that is evident from the impressive returns and low dispersion across time frames.

GLANCE AT THE INVESCO INDIA MANUFACTURING FUND NFO

Here are some details of the Invesco India Manufacturing Fund NFO you must know to decide on investing in the fund.

• The NFO of Invesco India Manufacturing Fund opened for subscription on July 25, 2024 and will close on August 08, 2024. Being an open-ended multi-cap equity fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. The Invesco India Manufacturing Fund is best suited to investors looking for long-term capital appreciation with an eclectic mix of large caps, mid-caps, and small caps.
• On the Standard SEBI Risk-O-Meter, the Invesco India Manufacturing Fund will be ranked as a Very High Risk Fund. The high risk is an outcome of the predominant exposure to equities (80% to 100%) that the Invesco India Manufacturing Fund will have. In addition, there is also the risk of entering the market at lifetime highs of the Nifty and the Sensex. There is also the risk of concentrated exposure to the manufacturing theme, making the fund performance vulnerable. The fund will be benchmarked for performance review to the Nifty India Manufacturing TRI Index.
• The Invesco India Manufacturing Fund is about generating capital appreciation from a diversified portfolio of equity and equity related instruments. The focus will purely be on companies engaged in the manufacturing theme or are collateral beneficiaries of the manufacturing theme. The fund does not offer any assurance on returns and it will have a minimum exposure of 80% to equities that adhere to the Manufacturing Theme.
• Investors can invest in the NFO of Invesco India Manufacturing Fund in minimum size of ₹1,000 lumpsum and in multiples of ₹1 thereof. Minimum additional purchases will be of ₹1,000. This also applies to switch-ins during the NFO. The fund also supports the systematic investment plans (SIPs) and systematic transfer plans (STPs) with the minimum allocation. For SIPs, the minimum instalment amount would be ₹500 for minimum 12 instalments, ₹1,000 for minimum 6 SIP instalments and ₹1,500 for minimum 4 monthly SIP instalments.
• While there is no entry load, there will be conditional exit load. If the funds are redeemed or switched out within 3 months from the date of allotment, it will subject to 0.50% exit load. There will be no exit load for any redemption or switch-out after 3 months from the date of allotment. However, leaving aside the prescribed exit loads; investors are advised to hold the fund for a minimum period of 5-7 years to get full benefits of the focused manufacturing theme of the Invesco India Manufacturing Fund.
• The Invesco India Manufacturing Fund does not give any guarantee on returns, being an equity oriented fund, and the performance is subject to the vagaries and vicissitudes of the market and the sector. The fund managers for the fund will be Amit Ganatra and Dhimant Kothari. Anecdotal evidence tells us that there is a chance that fund managers may not succeed in outperforming the benchmark.
• The Invesco India Manufacturing Fund NFO will offer the growth option and the IDCW (income distribution cum capital withdrawal) option. Within the IDCW option, the fund will offer the dividend payout option, and the dividend reinvestment option too. If the dividend payout is up to ₹100 for an investor, then it will be automatically mandatorily reinvested in the fund. The Invesco India Manufacturing Fund will offer investment via the Regular Plan as well as through the Direct plan.
• The Invesco India Manufacturing Fund will be classified as an equity fund for tax purposes; as long as its equity exposure is above 65%, which is the intent. The short term capital gains (held for under 1 year) will be taxed at 15% while long term capital gains (held for over 1 year), will be taxed at a flat rate of 10% beyond a minimum threshold exemption of ₹1 Lakh per financial year. There will be no indexation benefits on long term capital gains. Any dividends declared by the fund and paid will be subject to tax at the incremental rate of tax and the fund shall deduct TDS on such dividends, at the rates stipulated by the CBDT from time to time.

The Invesco India Manufacturing Fund NFO offers an opportunity for investors invest in a fund that offers a veritable play on the emerging manufacturing theme in India. The fund believes that manufacturing will be the big driver of GDP growth and per capital income growth in the coming year. The fund is poised to leverage on this expectation.