Sector funds are suited for individuals who have a slightly higher risk profile. You need to assess the prospects of the industry before you commit your funds to the sector fund. Sector funds have a high concentration towards a single industry, which increases the risk substantially. It is a deviation from the diversification ideology, which is an important means to reduce risk. There is increased focus on the transportation and logistics fund, and there are many fund houses which have launched new fund offerings (NFOs) with a focus on this sector. Here we try to deduce if it makes sense to invest in funds with transportation and logistics as an underlying theme.
1. Understand the key drivers for the sector funds:
After the pandemic, things are slowly falling back to routine. Among the other sectors which faced a severe downturn in demand, transportation and logistics were among them. They were technically at a cyclical bottom; the only direction now is upwards. The volume of operations across companies operating in this space is slowly increasing, resulting in revenue growth and profitability over the next few years.
Here are some factors which will contribute to the future growth of this sector
- A critical contributor to Indian economic recovery:
The transportation and logistics industry which encompasses a range of industries is an important barometer for the performance of the Indian economy. A turnaround in the economy is witnessed by the prospects of this sector. The sector’s growth is affected by the country’s employed population and rapidly growing middle class. Automobile companies which fall under the transportation industry, have been a reliable measuring compass of the Indian economy’s performance.
The logistics sector is an indicator of the robustness of the business segment, particularly the MSME, which was affected severely during the pandemic, a strong, robust logistics sector can become a differentiating factor. They have a direct impact on the imports and exports of the country.
- Sustainable business practices:
The transport sector is one of the industries which consistently endeavour to reduce their carbon footprint. There is increasing adoption of electric vehicles across the Indian populace. There is an effort from the Government to extend subsidies and incentives for increased mobility of sustainable transport vehicles. Many companies are endeavouring to build a comprehensive infrastructure which will ensure that the adoption of EVs (Electronic Vehicles) among the Indian populace is seamless and easy. It is estimated that by 2025, the Indian EV market could be worth Rs. 50,000 crores.
- Growth in e-commerce business:
The pandemic has shifted businesses online, and the growth in e-commerce over the past 2 years has been unparalleled. This essentially means that many people have shifted from buying from physical stores to buying online. This trend is convenient and cost-effective for many individuals. This translates favourably to multiple industries, including transportation and logistics. Logistics is an important sector that has helped e-commerce build capacity to match the demand.
2. Assess the fund details
While investing in a sector fund, whether an ongoing fund or an NFO, you must assess the fund before committing your hard-earned money.
Here are some pointers on how to assess sector funds:
- Fund manager:
Assessing the academic qualification, experience and area of expertise would give a sense of the ability of the fund manager to steer the fund’s performance towards the desired outcome.
- Scheme details:
The scheme investment document provides a detailed update on the objective of the fund. In the case of a sector fund, it would clearly state the type of companies that the fund proposes to invest in. It will help you understand where the amount you invest will eventually be invested in.
- Track record (if available):
If the fund is an NFO, there will be no track record available. However, if the fund is an ongoing one, then you should check the fund’s past performance and how it has fared during the rough seasons in the market. Always assess the sector funds over the long haul and concerning their respective benchmark.
- Category performance:
Often, if it is an NFO, you could check for the funds with a past track record and a similar objective. This will give a broad understanding of what type of returns to expect from the fund you intend to invest in. There are many websites where the funds are ranked, and you can assess the fund you want to invest in against your peers.
3. Alignment of fund risk with your risk profile:
The risk factors concerning the fund are mentioned in the scheme documents. There are also many websites which assess the risk factor and score the risk. Based on your comfort level, you can choose the fund that aligns best with your risk profile. Sector funds are typically high-risk funds. Hence if you are a newbie, it is advised that you choose to invest in a reasonably conservative fund and then, once you have gathered a deep understanding of the dynamics of the market, you can venture into the sector funds.
4. Suitability analysis:
Sector funds are for those investors who have a reasonably good understanding of the market dynamics. The transportation and logistics industry is expected to grow tremendously over the next few years as it emerges from a trough. However, the future is always uncertain. The assumption here is that the pandemic and similar challenges are well in the past, and the future remains conducive for economic recovery.
The future of the transportation and logistics industry looks interesting and positive. However, one should also remember that an economic slowdown can impact these sectors.
One should first build their core portfolio comprising of diversified equity funds and then consider adding a small portion of the portfolio in funds with transportation and logistics as an underlying theme provided one has - high risk appetite and can handle high volatility of such sector based funds. You could connect with the experts at Tata Capital Wealth for assistance.