India is an emerging global hub for auto component sourcing, growing population, and rising individual income has the potential to grow and boost the auto industry.
The Indian automobile industry benefits from a variety of variables, including low-cost skilled labour, strong R&D facilities, and low-cost steel production. The industry also offers excellent investment opportunities.
Passively managed mutual funds such as Exchange traded funds (ETFs) have emerged as a preferred avenue to invest in a particular sector because of the flexibility, greater transparency, lower costs, and tax benefits that it offers. ETFs aim to track the performance of benchmark indices of a particular sector/ theme contributing towards economic growth by investing in a basket of stocks forming part of the particular index. Investors seeking to bet on India’s automobile companies after the recent underperformance at their stock prices amid the pandemic could consider investing in the automobile sector via ETFs.
ICICI Mutual fund has come up with India’s first Auto ETF. The fund house has launched ICICI Prudential Nifty Auto ETF. It is an open-ended Exchange Traded Fund tracking Nifty Auto Index.
On the launch of this fund, Mr Chintan Haria, Head – Product Development & Strategy, ICICI Prudential Mutual Fund, said, “We believe through ICICI Prudential Nifty Auto ETF, investors will be able to tap into the evolving space of the Indian automobile industry. With India being an emerging global hub for auto component sourcing coupled with the Government support for electric mobility, we believe this space is likely to be under the spotlight.”
Table 1: Details of ICICI Prudential Nifty Auto ETF
| Type | An open-ended Exchange Traded Fund tracking Nifty Auto Index | Category | Exchange-Traded Fund |
| Investment Objective | The scheme's investment objective is to provide returns before expenses that closely correspond to the total return of the underlying index subject to tracking errors. However, there can be no assurance or guarantee that the scheme's investment objective will be achieved. | ||
| Min. Investment | Rs 1,000/- and in multiples of Re 1 thereafter. | Face Value | Rs 10/- per unit |
| Entry Load | Not Applicable | Exit Load | Nil |
| Fund Manager |
|
Benchmark Index | Nifty Auto TRI |
| Issue Opens: | January 5, 2022 | Issue Closes: | January 10, 2022 |
(Source: Scheme Information Document)
The investment strategy for ICICI Prudential Nifty Auto ETF will be as follows:
ICICI Prudential Nifty Auto ETF will aim to invest in stocks constituting the Nifty Auto Index in the same proportion as in the Index and endeavour to track the benchmark index. The scheme will track the underlying index to generate parallel returns and will more or less reflect the performance of the automobile segment.
The stocks comprising the underlying index are periodically reviewed by Index Service Provider. A particular stock may be dropped, or new securities may be included as the index’s constituent. In such an event, the fund will endeavour to reallocate its portfolio but the available investment/ disinvestment opportunities may not permit precise mirroring of the underlying index immediately. The portfolio will be rebalanced within 7 days to ensure adherence to the asset allocation norms of the scheme.
Similarly, in the event of a constituent stock being demerged / merged / delisted from the exchange or due to a major corporate action in a constituent stock, the fund may have to reallocate the portfolio and seek to minimize the variation from the index. In such events, it may be more prudent for the fund to take exposure through derivatives of the index itself or its constituent stocks to minimize the long-term tracking error.
A very small portion (0-5% of the Net Assets) of the fund may be kept liquid to meet the liquidity and expense requirements. The performance of the Scheme may not be commensurate with the performance of the underlying index on any given day or over any given period. Such variations are commonly referred to as the tracking error. The fund intends to maintain a low tracking error by closely aligning the portfolio in line with the index.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation for ICICI Prudential Nifty Auto ETF
| Instruments | Indicative Allocation (% of net assets) | Risk Profile | |
| Minimum | Maximum | High/Medium/Low | |
| Equity and Equity related securities of companies constituting the underlying index (Nifty Auto Index) | 95 | 100 | Medium to High |
| Money market instruments including TREPs*, Units of debt schemes# | 0 | 5 | Low to Moderate |
| Units of Debt ETFs | 0 | 5 | Low to Moderate |
*Or similar instruments as may be permitted by SEBI/RBIfrom time to time, subject to requisite approvals from SEBI/RBI, as applicable.
# Excluding subscription money in transit before deployment/payout.
(Source: Scheme Information Document)
About the benchmark
The NIFTY Auto Index is designed to reflect the behaviour and performance of the Automobiles segment of the financial market. The NIFTY Auto Index comprises 15 tradable, exchange listed companies. The index represents auto-related sectors like Automobiles 4 wheelers, Automobiles 2 & 3 wheelers, Auto Ancillaries, and Tyres.
NIFTY Auto Index is computed using the free float market capitalization method, wherein the index level reflects the total free float market value of all the stocks in the index relative to particular base market capitalization value.
Here’s the list of the top 10 constituents by their weightage under the Nifty Auto Index:
(Source: Nifty Auto Index Factsheet as of December 31, 2021)
Who will manage ICICI Prudential Nifty Auto ETF?
Mr Kayzad Eghlim and Mr Nishit Patel will be the dedicated fund managers for this scheme.
Mr Kayzad Eghlim has more than 30 years of experience in financial services, and he holds an MBA, M.Com, and B.Com degrees. Prior to joining ICICI Pru AMC, he was associated with IDFC Investment Advisors Ltd. as Dealer – Equities; Prime Securities as a Manager; Canbank Mutual Fund (IS Himalayan Fund) as a Fund Manager; and Canbank Mutual Fund as Equity Dealer assisting the Fund Manager. He has worked with the Primary Market Department (IPO) at the beginning of his career.
At ICICI Pru AMC, Mr Kayzad currently manages ICICI Prudential Equity – Arbitrage Fund, ICICI Prudential Nifty 100 ETF, ICICI Prudential Nifty Next 50 Index Fund, ICICI Prudential Nifty ETF, ICICI Prudential NV20 ETF, ICICI Prudential Sensex ETF, ICICI Prudential Nifty Index Fund, ICICI Prudential Equity Savings Fund, ICICI Prudential Nifty Low Vol 30 ETF, BHARAT 22 ETF, ICICI Prudential S&P BSE 500 ETF, ICICI Prudential Nifty Next 50 ETF, ICICI Prudential Bharat 22 FOF, ICICI Prudential Bank ETF, ICICI Prudential Midcap Select ETF, ICICI Prudential Midcap 150 ETF, ICICI Prudential Alpha Low Vol 30 ETF, ICICI Prudential IT ETF,ICICI Prudential Nifty Low Vol 30 ETF, ICICI Prudential Healthcare ETF, and ICICI Prudential FMCG ETF
Mr Nishit Patel joined ICICI Prudential Asset Management Company Limited in November 2018 and was working under ETF Business. He is a Chartered Accountant and B.Com graduate. At ICICI Pru AMC, Mr Patel currently managesICICI Prudential Midcap Select ETF, ICICI Prudential Nifty 100 ETF, ICICI Prudential Nifty Next 50 Index Fund, ICICI Prudential Nifty ETF, ICICI Prudential NV20 ETF, ICICI Prudential Sensex Index Fund, ICICI Prudential Nifty Index Fund, ICICI Prudential Regular Gold Savings Fund (FOF), ICICI Prudential Gold ETF, ICICI Prudential Sensex ETF, ICICI Prudential S&P BSE 500 ETF, ICICI Prudential BHARAT 22 FOF, ICICI Prudential Nifty Next 50 ETF, ICICI Prudential Bank ETF, ICICI Prudential Private Banks ETF, ICICI Prudential Midcap 150 ETF, ICICI Prudential Alpha Low Vol 30 ETF, BHARAT 22 ETF, ICICI Prudential IT ETF, ICICI Prudential Nifty Low Vol 30 ETF, ICICI Prudential FMCG ETF, and ICICI Prudential Healthcare ETF.
Fund Outlook – ICICI Prudential Nifty Auto Index
ICICI Prudential Nifty Auto Index aims to provide returns that closely correspond to the total return of benchmark Nifty Auto Index subject to tracking errors. The scheme offers investors an exposure to blue-chip auto and auto ancillary stocks that comprise the underlying benchmark index.
The underlying benchmark Nifty Auto Index reflects the behaviour and performance of the automobiles segment of the financial market. The companies consisting of the underlying index are focused on manufacturing and production of electric vehicles, which offers emerging opportunities to investors.
The scheme offers investors an opportunity to participate in the automobile sector and be a part of the industry fueling India’s growth story. The automobile sector is cyclical in nature. It closely follows various phases of the economic cycle and may be affected due to macroeconomic changes in the future.
The looming threat of the Omicron variant that has led to the rapid rise of COVID-19 cases in India could act as a major headwind to the economy. Due to this, people may prefer to cut back on big ticket discretionary spending such as buying a vehicle and instead focus on essentials. This could dent the demand for automobiles in the near term and therefore, the sector could witness higher volatility in the near term.
Being a sector-oriented ETF, do note that the scheme will follow a concentrated investment approach towards the automobile sector. The fortune of this scheme will depend on the performance of the underlying sector. These factors, among many others, could have a bearing on the scheme’s performance and may affect negatively if the sector moves out of favour. This makes it a highly risky investment proposition.
Thus, the scheme is suitable for investors who are aware and well-versed with the entry and exit in the sector and have a high-risk appetite with a long investment horizon to sustain various market phases.
This article first appeared on PersonalFN here
