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 industries do manufacturing mutual funds invest in?
Advantages of investing in manufacturing mutual funds
Who should invest in manufacturing sector mutual funds?
Risks of investing in manufacturing mutual funds
Who should invest in manufacturing mutual funds?
How to invest in manufacturing funds?
Taxation on manufacturing mutual 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 industries do manufacturing mutual funds invest in?

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.

Risks of investing in manufacturing mutual 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.

Who should invest in manufacturing mutual funds?

Manufacturing mutual funds may be considered by:

Investors with a high risk appetite who are potentially looking to build wealth over time through sector-focused exposure.
Those with a long-term investment horizon, as manufacturing cycles may take time to play out.
Investors who already have diversified exposure across broad-based equity funds and are seeking limited thematic allocation.
Experienced investors who are comfortable tracking sector developments, policy changes, and industrial trends.

These funds may not be suitable for investors with short-term goals or those seeking relatively steady portfolio behaviour.

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.

Taxation on manufacturing mutual funds

Since these schemes typically invest more than 65% of their portfolio in equity and equity-related instruments of manufacturing-oriented companies, they are classified as equity-oriented mutual funds for taxation purposes under Indian tax laws.

The tax treatment depends on the holding period of the investment:

Short-term capital gains (STCG): If units of a manufacturing mutual fund are redeemed within 12 months from the date of investment, any gains are treated as short-term capital gains. As per the latest tax provisions applicable after the 2024 Budget, STCG on equity-oriented mutual funds is taxed at 20%, plus applicable surcharge and cess.
Long-term capital gains (LTCG): If the holding period exceeds 12 months, gains are classified as long-term capital gains. LTCG on equity-oriented mutual funds is taxable at 12.5% on gains exceeding ₹1.25 lakh in a financial year, without the benefit of indexation. Gains up to this threshold are exempt from tax.

In addition to capital gains tax, any IDCW (Income Distribution cum Capital Withdrawal) payout received from manufacturing mutual funds is taxable in the hands of the investor at their applicable income tax slab rate.

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.

Frequently Asked Questions

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 does a manufacturing fund work?

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:

Are manufacturing mutual funds tax-efficient?

Manufacturing mutual funds are equity-oriented thematic funds, so their tax treatment follows equity fund rules and doesn't have any special tax-efficiency. Taxation depends on holding period, potential returns earned, and investor tax profile. Maintaining an investment horizon of at least a year can reduce tax burden because the long-term capital gains tax rate (levied on equity investments held for a year or more) is lower than the short-term capital gains tax rate.

What distinguishes manufacturing mutual funds from sectoral funds?

Sectoral funds are a category of mutual funds that invest in companies belonging to a specific sector of the economy. Manufacturing mutual funds are one type of fund within this broader category, focusing on companies involved in manufacturing and industrial activities.

While sectoral funds may focus on areas such as banking, IT, or pharmaceuticals, manufacturing mutual funds concentrate on manufacturing-led businesses. Depending on the scheme’s design, a manufacturing fund may invest within a specific manufacturing-related sector or across closely linked manufacturing segments.

Can I invest in manufacturing mutual funds through SIP?

You can generally invest in manufacturing mutual funds through SIP or lumpsum modes, subject to the scheme’s terms.

How volatile are manufacturing mutual funds compared to diversified equity funds?

Manufacturing mutual funds may exhibit higher volatility than diversified equity funds due to sector concentration. Performance depends on industrial cycles, policy changes, and input costs. Diversified equity funds spread exposure across sectors, which may moderate volatility. Manufacturing funds, therefore, may require relatively higher risk appetite and longer investment horizons.

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.

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.

Author

Soumya Rao

Sr Content Manager, Bajaj Finserv AMC |

Soumya Rao is a writer with more than 10 years of editorial experience in various domains including finance, technology and news.

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