Narendra Modi 3.0 here! 6 best mutual funds to benefit most from the government’s comeback

The NDA alliance, under BJP leadership, secured victory once more in the 2024 general election, thus, setting the ball rolling for the incumbent government to pursue its policies while promoting investments in various spheres.

Initially, the markets responded unfavorably to the news of the coalition, but they rebounded swiftly as the ruling party assured stability and expressed its determination to establish the upcoming Modi 3.0 administration. Presently, investors are optimistic, with some placing bets on sectors and domains where they anticipate the current government will maintain its focus in the coming years. Furthermore, investors seek stability and predictability, making a government that is expected to uphold its present policies particularly appealing.

Which sectors inspire hope for investors?

Investors’ expectations are well-founded. They are largely banking on the government’s prior emphasis on infrastructure development, economic reforms, and social welfare initiatives. Past performance sets the stage for the future, highlighting specific sectors of the Indian economy poised for growth in the upcoming years.

Mutual funds across various categories stand to potentially gain significantly during Modi 3.0, particularly those with investments in defense, manufacturing, infrastructure, banking and financial services, technology, and notably, the healthcare and pharmaceutical sector.Also Read: Large, mid, and small cap stocks: Mutual fund buying and selling trends for May unveiled

Investing in defence funds

Peace appears elusive as numerous countries prepare for potential conflicts. The turbulent global landscape, compounded by terrorism and ongoing tensions with neighbors like China and Pakistan, has compelled the Indian government to bolster its defense infrastructure.

India encounters distinctive challenges due to its extensive borders and intricate geopolitical positioning. Consequently, the current government is making substantial investments in modernizing military equipment and boosting domestic production, exemplified by initiatives such as “Aatmanirbhar Bharat” (Self-Reliant India). The recent budgetary increase in defense allocation underscores the government’s commitment to enhancing the capabilities of the armed forces.

At present, only the HDFC Defence Fund directly targets the mutual fund sector in India. For those unfamiliar, this thematic mutual fund was introduced by HDFC Mutual Fund in June 2023. It exclusively targets companies linked with the Indian defense sector, striving to achieve long-term capital appreciation. Undoubtedly, the fund has notably surpassed both the broader market and its category average during this period. However, despite its impressive performance, some critics persist in labeling it “Very High Risk” due to its focused concentration on a particular sector.

Another mutual fund in the same category would be the Motilal Oswal Nifty India Defence Index Fund. On June 13, 2024, Motilal Oswal Asset Management Company (MOAMC) introduced the Motilal Oswal Nifty India Defence Index Fund, marking India’s inaugural index fund centred on defense stocks. This open-ended fund will mirror the Nifty India Defence Index, and its new fund offer (NFO) will be accessible from June 13 to June 24, 2024. The performance evaluation of the scheme will be based on the Nifty India Defence Index.

Comprising 15 companies engaged in defense project manufacturing and services, the Nifty India Defence Index reflects their market performance. As of May 31, 2024, the index has demonstrated a compound annual growth rate (CAGR) of 177% over the past year and 89.5% over three years. Despite its robust potential, the sector exhibits higher volatility.

Compared to most other mutual fund types, funds in the defence sector are relatively new, thus, highlighting how investors must rely on the funds’ past returns and their judgement regarding mutual fund selection while deciding whether and to what extent to invest in them.

Investing in manufacturing funds

Manufacturing funds are an appealing alternative for investors looking to capitalize on India’s booming industrial industry. With initiatives like “Make in India” and a focus on self-sufficiency, the manufacturing industry is primed for expansion, potentially giving significant returns to investors.

These funds often invest in several manufacturing segments, thereby diversifying the business. They are actively managed by experienced portfolio managers and seek out firms with good growth prospects. Sceptics point out that manufacturing is subject to economic cycles, and a slowdown might have an impact on manufacturing enterprises and, as a result, fund returns.

Some manufacturing funds in India are relatively new, so historical performance data may be limited. Furthermore, manufacturing equities are more volatile than the broader market, which can lead to considerable variations in the fund’s value.

Investors have a plethora of mutual funds in the manufacturing sector to select from. The table below delineates the array of manufacturing funds and showcases how investors have consistently benefitted from investing in these funds since their inception.

The most popular benchmark for evaluating the performance of Indian manufacturing funds is without a doubt the Nifty India Manufacturing TRI (Total Return Index). This index serves as a helpful benchmark for these funds and is specifically made to track the performance of companies in the manufacturing sector. The TRI version is different in that it shows the performance of the fund in a more comprehensive manner by factoring in both price appreciation and dividends.

This index, which includes manufacturing-related companies from the Nifty 100, Nifty Midcap 150, and Nifty Smallcap 50, gives weight to each stock according to its free-float market capitalization, meaning that bigger firms have more sway. The TRI offers a more accurate representation of the total return produced by the index since it takes into account both changes in the index price and dividend payments made by the component companies.Also Read: Equity mutual fund inflows skyrocket to record ₹34,697 crore in May, SIPs reach ₹20,904 crore: AMFI

Investing in infrastructure funds

India’s unwavering commitment to infrastructure development strengthens the case for investigating infrastructure-focused mutual funds. Over the last decade, the government has consistently prioritised investment in infrastructure projects such as roads, bridges, trains, and power grids, resulting in sectoral growth. Furthermore, the growing urbanisation trend is driving demand for additional infrastructure in cities, including housing, transportation, and sanitary services.

The growing emphasis on renewable energy sources like solar and wind power necessitates investments in transmission lines and other infrastructure. These funds invest in companies in the construction, building materials, engineering, and other infrastructure-related industries that are well-positioned to benefit from the government’s initiatives.

By distributing investments among several infrastructure segments, infrastructure funds provide diversification within the industry. The long-term nature of infrastructure projects implies that these funds have the potential to see significant long-term capital growth.

Investors have a plethora of infrastructure funds to choose from for potential investment. The table below showcases the performance of various infrastructure funds up to the present date.

The S&P BSE India Infrastructure TRI serves as a widely recognized benchmark, monitoring the total return performance of companies within the infrastructure sector listed on the Bombay Stock Exchange (BSE). Encompassing companies engaged in diverse segments such as construction, power, transportation, and real estate, it provides comprehensive insight into the sector’s performance.

Fund houses may use the Nifty 50 TRI as a backup benchmark in specific situations. This broad market index provides a broad comparison of the fund’s performance against the stock market as a whole, even though it is not specifically designed for infrastructure.

Certain fund houses may create specialized benchmarks that are intended to represent particular investment philosophies or strategies. These customized benchmarks might focus on a specific infrastructure subsector or give different weights to different companies than the ones found in standard benchmarks.

Investing in banking and financial services funds

The banking and financial services industry in India is rapidly changing due to changes in consumer demands, government policies, and technology improvements. Significantly, open banking laws are being implemented, encouraging collaborations between fintech companies and banks to develop innovative financial solutions. In response, banks are expanding their reach, especially in rural areas, by investing heavily in digital lending platforms, online account opening services, and mobile banking applications.

Moreover, India boasts a substantial fintech adoption rate, witnessing an upsurge in startups providing inventive solutions across payments, wealth management, and insurance domains. In fostering innovation while mitigating risks, the RBI has established a regulatory sandbox for the fintech sector.

Additionally, to enhance financial inclusion, the RBI has granted new licenses for differentiated banking models such as payment banks and small finance banks (SFBs). Furthermore, both the government and RBI are spearheading initiatives to augment credit accessibility for micro, small, and medium enterprises (MSMEs). Notably, mergers and acquisitions among banks are underway, aiming to fortify financial institutions.

Investment in banking and financial services fund(s) is not new. Sadly, not all have performed to the optimum. The reasons may be myriad though investors focus only on some of the top performing funds hoping that the fund houses would be able to continue at this pace in the future too.

The primary benchmark used for banking and financial services funds is typically the NIFTY Financial Services Index (India). Widely recognized in India, this index monitors the performance of prominent companies within the banking, financial services, and insurance sectors (as per an Investopedia article on banking sector benchmarks). Variants such as the Total Return Index (TRI) incorporate reinvested dividends for a more comprehensive assessment.

Investing in technology funds

Myriad factors are responsible for the impressive growth that India’s tech sector is experiencing. The need for IT services, software development, and other technological solutions is growing as a result of people’s and businesses’ growing reliance on technology.

In addition, the “Digital India Initiative” has been instrumental in building a strong digital infrastructure throughout the country that includes digital services, internet access, and the advancement of digital literacy. This creates the foundation for tech companies to thrive.

Furthermore, by supporting homegrown manufacturing, the “Make in India” campaign fosters a trained labour force and a strong regional ecosystem for the production of hardware, both of which are essential for the IT industry. In addition, the “Startup India” initiative provides resources and support to new businesses, encouraging creativity and entrepreneurship and bringing in new talent and ideas to the technology sector.

Mutual funds centred on the technology sector present enticing opportunities for investors, thanks to promising growth prospects and favourable government policies. The persistent digital revolution underscores the enduring investment potential within technology companies.

The allure of the technology sector has prompted numerous mutual fund houses to introduce technology funds, enticing investors to allocate a portion of their earnings to them. India’s thriving tech industry has catalyzed a ripple effect in the mutual fund arena, with more fund houses actively rolling out new technology-focused funds to harness the sector’s growth potential. These funds typically invest in companies spanning various tech sub-sectors such as software, hardware, internet services, and beyond. Additionally, some existing sectoral funds may have bolstered their allocation towards technology companies to reflect the sector’s escalating significance.

The aforementioned table delineates the proliferation of technology fund launches by various fund houses, as investors acknowledge the potential for substantial returns in the tech sector, driven by high growth.

Technology funds in India are frequently assessed on how well they perform in comparison to two main benchmark indices:

• One of the preferred metrics for evaluating the performance of technology funds in India is the NIFTY IT Index (TRI). The largest and most liquid information technology companies listed on the National Stock Exchange of India (NSE) are tracked by this market capitalization-weighted index. Reinvested dividends are included in the Total Return Index (TRI) variant, which offers a more thorough view of returns.
• In a similar vein, another widely used benchmark for technology funds is the BSE TECk Index (TRI). Additionally, it is an information technology sector-focused market capitalization-weighted index on the Bombay Stock Exchange (BSE). The TRI version of this index, like the NIFTY IT Index, incorporates reinvested dividends for a comprehensive evaluation of performance.

Investing in pharma and healthcare funds

Interest in the Indian healthcare and pharmaceutical sector is on the rise due to various factors, notably the recent pandemic and government initiatives. The pandemic underscored the necessity of a resilient healthcare system, prompting heightened investments, both public and private, in healthcare infrastructure, medical equipment, and research and development.

Several catalysts are propelling substantial expansion in the Indian healthcare and pharmaceutical sectors. Here are some pivotal considerations:

• Market expansion: According to projections [source for India’s healthcare market size], the country’s healthcare sector will reach extraordinary heights by 2024. This growth creates opportunities for manufacturers of medical devices, pharmaceutical companies, and a variety of healthcare providers.
• Attention to affordability: Although the private healthcare industry is booming in cities, affordability is still a problem in rural areas. This reinforces the demand for affordable healthcare options and generic drugs, utilizing India’s strong position in this field.
• Growth of medical tourism: Patients from nearby countries and abroad are being drawn to India by its reputation for offering excellent medical care at reasonable costs. This growing market is starting to take center stage in the healthcare industry.

Investments are made in a variety of healthcare sectors by pharmaceutical and healthcare funds in India, including:

• Pharmaceutical businesses
• Healthcare facilities and hospitals
• Manufacturers of medical devices
• Diagnostic chains

The following table illustrates some of the top-performing pharma and healthcare funds that investors may decide to include in their investment portfolios to gain from the rapid advances expected in the coming five years.

Without a doubt, the pharmaceutical and healthcare industries in India are positioned for significant expansion. India is well-positioned to become a global leader in the provision of accessible and reasonably priced healthcare with continued support from the government, investments from the private sector, and coordinated efforts to address current issues.

Alternative to thematic fund investments

Given the risk associated with thematic funds, many investors opt to redirect their attention toward flexi-cap funds. Unlike thematic funds, flexi-cap funds spread investments across companies of varying market capitalizations (large, mid, and small), resulting in more diversified portfolios. While flexi-cap funds are generally considered moderately risky due to their diversification, they still carry market risk. Although there is potential for favourable returns, they may not outperform thematic funds during periods of significant growth in a specific theme.

Long-term investors may find flexi-cap funds attractive because they offer exposure to growth potential across various market segments. However, depending on which industry you believe in the most, you may think about investing in any one of the aforementioned themes if you have a high tolerance for risk and a strong belief in that particular theme. Before investing, it would be best to learn about thematic funds and the risks involved; however, getting advice from a financial advisor can help you make the right financial decisions.