Will 'Make in India' focussed schemes make money for you?

Feroze Azeez
AnandRathi

Against the backdrop of Asia bustling as the outsourcing hub of the world, Prime Minister Narendra Modi, in September 2014, launched "Make in India" drive. This important step was taken with the intention of reviving the manufacturing business by making India the preferred manufacturing destination worldwide. This initiative, if successful, could have numerous benefits for our economy in the areas of employment generation, export growth, improved capital flows and GDP expansion, to name a few.

India already has a great advantage in terms of availability of natural resources and sustainable availability of low-cost, skilled and semi-skilled workforce, as compared to other countries. In addition, the government is working towards creating an environment conducive for development by improving the ease of doing business through standardization of procedures and focusing on effective governance. This is likely to attract foreign investments and corporates across the globe would be more willing to set up their businesses in India, thereby, creating huge employment opportunities.

Presently, the manufacturing sector contributes just over 15% to the national GDP. Through this initiative government aims to increase this contribution to 25% by 2022. As manufacturing activities gather momentum, India will transform into a manufacturing hub. This will steadily increase exports and have a positive impact on the current account deficit. Subsequently, the Indian economy will experience growth albeit an incremental one.

Stirred by these developments, several fund houses have launched/are launching schemes such as Birla Sun Life Manufacturing Equity Fund, JP Morgan India Economic Resurgence Fund or Pramerica Build in India Fund, which will invest in companies in the manufacturing space.

The concept of Make in India could be a turning point in the Indian growth story and as the campaign succeeds, the economy, as a whole, as well as select sectors will benefit from this. Yet, in our view, investing in a fund focusing on a particular theme is not advisable. This is because every theme goes through a phase in the market cycle during which it does well and beats other sectors. However, it is often difficult for an investor to judge when the favourable phase for a theme will start or end. This makes it difficult for the investor to exit at the right time. Moreover, some of these funds are close-ended in nature with a defined maturity date and there is absolutely no guarantee that the theme will do well in the defined period.

In case the thematic fund is open-ended, the fund manager is bound by the fund mandate, which restricts his flexibility to invest in other sectors. This could adversely affect the fund returns once the positive phase of the theme ends.

In contrast, investors can benefit from the thematic plays by investing in diversified funds. We have enough reasons to believe that diversified funds have the potential to perform across market cycles as the fund managers of diversified funds actively align their portfolio by considering sectors that are currently favourable. Thus, investors can invest in diversified funds, leave the responsibility of grabbing opportunities to the fund managers and reap the benefits of all themes from time to time.