The automotive industry is undergoing a shift and attempting to switch to alternate intensive options such as electric vehicles in order to reduce the burden of rising pollution, scarcity of oil imports and complete international commitments to tackle the global climate change. These are few key factors encouraging India’s automotive industry to adapt the change and speed up the transition to e-mobility.
Consequently, as a part of Paris agreement in 2015, India committed to reduce the emission intensity of its gross domestic product (GHG emissions per unit GDP) by 33% – 35% over 2005 levels by 2030. The government is keen to shift the narrative towards electric vehicles, to meet its global commitment and mitigate adverse impact of the automobiles increasing oil import expenses and rise in air pollution.
On September 15, 2021, the government approved a Product Linked Incentive (PLI) scheme for the automobile and drone industry. It is for ACC battery storage manufacturing to promote domestic production of batteries and reduce dependence on imports. This will support the domestic Electric Vehicle Industry with the required infrastructure to produce electric vehicles in India.
The PLI scheme intends to incentivize high value advanced automotive technology vehicles and products, including green automotive manufacturing. It is open to existing automotive companies as well as new investors who are currently not in the automobile or auto component manufacturing business.
The Electric Vehicle industry has gained traction with the rising demand globally. Many start-ups and conventional automakers are seeking to ride on the opportunity thrown open by electric mobility. Many investors are seeking to benefit from this shift in the automotive industry.
Investors see good long-term opportunities in this automobile market segment owning to investment in high quality companies in the electric vehicle supply chain. When it comes to investing in Electric Vehicle segment, there are stocks available on the exchange of automaker companies involved in producing electric vehicles such as the well-known electric vehicle maker TESLA.
Investors are seeking to benefit from the growth potential of the automotive industry from this paradigm shift to electric vehicles for two wheelers, three wheelers, four wheelers, passenger vehicles, etc. Indian investors will soon be able to invest in companies globally that are involved in electric vehicles and assisted driving technologies sectors.
What is Electric Vehicles Fund?
Electric Vehicles Fund is a new equity-oriented thematic fund in the mutual fund universe. It aims to invest in securities of the companies focused on manufacturing or promoting the electric vehicles and driving technologies. These funds endeavour to provide investors an opportunity to generate gains from the growth prospects of the transitional shift to e-mobility.
Recently, Navi Mutual Fund founded by Sachin Bansal (Founder and former CEO & Chairman of Flipkart) has filed a draft document with the SEBI for launch of a new electric vehicles fund i.e. Navi Electric Vehicles and Driving Technology Fund of Fund (FoF). It is an open-ended fund of fund investing in units of overseas ETF’s and/or Index Fund based on STOXX Global Electric Vehicles & Driving Technology NET Index.
Investment Objective: The investment objective of Navi Electric Vehicles and Driving Technology Fund of Fund (FoF) is to provide long-term capital appreciation by investing in units of overseas ETF’s and /or Index Fund that invest in Electric Vehicles and Driving technology. However, there is no assurance that the investment objective of the scheme will be realized.
Benchmark: The scheme will benchmark its performance against STOXX Global Electric Vehicles & Driving Technology NET Index. This Index is comprised of companies from selected countries exposed to a defined theme of electric vehicles and assisted-driving technologies. This is one of the leading indices in the EV segment. Thus, the composition of the aforesaid benchmark index is such that it is most suited for comparing performance of the Scheme.
It includes leading companies, which are involved in the manufacturing of electric and autonomous vehicles, battery suppliers for electric vehicles, and other suppliers in the electric and autonomous vehicle manufacturers’ supply chain.
Top 10 components under the STOXX Global Electric Vehicles & Driving Technology NET Index:
(Source: STOXX Index )
Investment Strategy: The scheme follows a passive investment strategy and the corpus of the scheme will be invested in instruments, which will include but not limited to units of overseas ETF’s and/or Index Fund that invest in Electric Vehicles and Driving Technology.
The scheme will invest in a combination of exchange-traded funds and index funds, and will allow investors with an international exposure. It will indirectly invest in international funds focusing on development of aspects related to electric vehicles and advancement in driving technologies.
The Navi Mutual fund house is primarily focusing on passive funds. The reason for investor’s sentiment tilting towards passive funds could be that they are easy to understand, not too complex, cost-effective and have even outperformed the actively managed funds in past few years.
Passive investing is the simplest mode for new and conservative investors to invest in mutual funds. The purpose of this style of investment is to mirror the index performance and generate optimal returns and not to outperform the index. It is noteworthy that, Navi Mutual Fund has earlier filed for a couple of new funds with SEBI, which were also passively managed funds.
In a recent interview regarding filing of new electric vehicles fund, Mr Sanjay Bansal founder and CEO of Navi Mutual Fund said, “Our focus is completely on passive funds. Customers understand index funds very easily; we want to sell something where customers can make a decision without advisors. Index funds are more simple. We believe it will scale because it is simple to understand.”
Should investors consider an investment in ‘Electric Vehicles Fund’?
India’s Electric Vehicle space is at a nascent stage and is an untapped market that is evolving gradually. However, globally electric vehicle segment has gained traction and many investors are willing to invest in this space through direct equities or via mutual funds.
In addition, while growth in the Electric Vehicle industry is on an upward tick, there is a long-term investment opportunity for investors. The uncertainties of COVID-19 pandemic have somehow slowed the industry’s progress and dampened the overall market demand. As soon as we recover from the effects of the pandemic this EV segment is estimated for a potential growth in future.
Looking at the environmental concerns, many companies are adapting to the environment friendly alternatives and use of electric vehicles is one of them. Leading players like OLA Electric Mobility Pvt, Ather Energy, and Mahindra Electrics that are rapidly growing their market presence currently drive India’s EV industry. The domestic market may take a while to attract the investor sentiment. However, the launch of new fund by Navi Mutual Fund, if approved by SEBI, provides Indian investors an exposure to the global EV industry.
You see, this will be the first fund of fund scheme passively investing in electric vehicles space through overseas ETFs/Index funds. It is suggested to avoid making decisions influenced by a market trend. Instead, take some time to gain a thorough understanding of the fund and its underlying schemes.
Being a thematic fund with indirect overseas investment, it will also be prone to various risks such as geo-political risk, currency risk, and change in social situation of the countries the underlying schemes belong to. It will focus on a particular theme of electric vehicles and driving technologies. The fund will also bear concentration risk and thus its performance may be hampered if the sector goes out of favour.
Therefore, only high-risk investors with long investment horizon of at least 5-7 years may consider investing in such thematic funds and only after sufficient information is available. Investments in a Fund-of-Funds (FoF) scheme that’s focused on electric vehicles also involves how the fund managers track the underlying scheme with minimum tracking errors.
Investors not convinced with the idea may skip any investment in ‘Navi Electric Vehicles and Driving Technology Fund of Fund (FoF)’ unless it has built a strong performance track record that can be used for overall evaluation.
Please note, investors will be able to invest in such funds only after they get approval from SEBI.
You see, in recent times, there has been spread of awareness about environmental issues, social issues and alternatives to mitigate the environmental concerns. Investors are also exhibiting keen interest in mutual funds with themes supporting the environmental concerns such as ESG theme and the latest Electric Vehicle theme.
Investing in thematic or sector-oriented fund should be done cautiously. You must ensure your risk appetite, investment horizon and investment objective. Investment in thematic and sectoral funds may help diversify and enhance your portfolio returns; but you must consider the associated risk that can lead to higher volatility, if the underlying theme or sector goes out of favour.
However, you may consider allocating a small portion of your investment portfolio of up to 5-10% for such thematic funds.
This article first appeared on PersonalFN here