During the upcoming year, India’s automobile sector expects steady demand to continue. With government policy support, the Indian Automobile Industry has the potential for healthier growth in the long run – particularly manufacturing Electric Vehicles and auto components required for their production.

But currently, the third COVID wave (with both Delta and the Omicron variant) and rising of auto commodity prices, is putting India’s auto industry back into the slow lane and is impacting its recovery. Amidst such times, Nippon India Mutual Fund has launched Nippon India Nifty Auto ETF – the country’s first auto ETF. It is an open-ended Exchange Traded Fund replicating/tracking the Nifty Auto Index.

On the launch of this fund, Mr Hemen Bhatia – Head ETF at Nippon India Mutual Fund said, “Nippon India Nifty Auto ETF, which is the first Auto sector ETF to be launched in India, will provide a simple and low-cost (in terms of total expense ratio) portfolio building block to participate in the auto sector. With most headwinds like supply constraints of semi-conductor along with increasing commodity prices behind us and with the street view moving from fear of electrification to seeing Electric Vehicle (EV) as an opportunity, investors will get exposure to EV theme as well, as part of the overall auto sector exposure.”

Table 1: Details of Nippon India Nifty Auto ETF

Type An open-ended Exchange Traded Fund replicating/tracking Nifty Auto Index Category Exchange Traded Fund
Investment Objective The investment objective of the scheme is to provide investment returns closely corresponding to the total returns of the securities as represented by the NIFTY Auto Index before expenses, subject to tracking errors. However, there can be no assurance or guarantee that the investment objective of the Scheme 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 Mr Mehul Dama Benchmark Index Nifty Auto TRI
Issue Opens: January 5, 2022 Issue Closes: January 14, 2022

(Source: Scheme Information Document

The investment strategy for Nippon India Nifty Auto ETF is as follows:

Nippon India Nifty Auto ETF is a passively managed exchange traded fund that will employ an investment approach designed to track the performance of NIFTY Auto TRI. The scheme seeks to achieve this goal by investing in securities constituting the NIFTY Auto Index in the same proportion as in the Index.

The scheme’s investment strategy endeavours to reduce the non-systematic risk of security selection by the fund manager by passively investing in the basket of stocks of the underlying index, i.e., Nifty Auto Index. The Scheme will invest at least 95% of its total assets in the securities comprising the Underlying Index. The scheme may also invest in money market instruments to meet the liquidity and expense requirements.

The scheme’s performance 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 tracking errors. 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 Nippon India Nifty Auto ETF

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Securities constituting NIFTY Auto Index 95 100 Medium to High
Money Market Instruments* including Tri-Party Repo on Government securities or Treasury bills, cash & cash equivalents 0 5 Low to Medium

*Money Market Instruments include commercial papers, commercial bills, treasury bills, and Government securities having an unexpired maturity up to one year, call or notice money, certificate of deposit, usance bills, BRDS, Tri-Party Repos on Government securities or Treasury bills, and any other like instruments as specified by the Reserve Bank of India from time to time.

(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.

Here’s the list of the top 10 constituents by their weightage under the Nifty Auto Index:

Nifty Auto Index

(Source: Nifty Auto Index Factsheet as of December 31, 2021

Note, the review of the index is undertaken semi-annually based on data for six months ending January and July and made effective from the last trading day of March and September.

The 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 a particular base market capitalization value.

Who will manage Nippon India Nifty Auto ETF?

Mr Mehul Dama will be the dedicated fund manager for this scheme.

Mr Mehul Dama is a B.com graduate and a Chartered Accountant (CA) with an overall experience of 14 years in the financial services industry. Before joining Nippon India AMC, he was associated with Goldman Sachs Asset Management (India) Private Limited as Vice President – Controllers, Benchmark Asset Management Company Private Limited as Assistant Vice President – Operations / Controllers, and Lovelock & Lewes as Assistant Manager.

At Nippon India AMC, Mr Dama currently manages Nippon India ETF ConsumptionNippon India ETF Dividend OpportunitiesNippon India ETF Gold BeESNippon India ETF Infra BeESNippon India ETF Nifty 100Nippon India ETF NV20Nippon India ETF PSU Bank BeESNippon India ETF SensexNippon India ETF Shariah BeESNippon India Index Fund – Nifty PlanNippon India Index Fund – Sensex PlanNippon India Gold Savings FundNippon India ETF Nifty Midcap 150Nippon India Junior BeES FoFNippon India ETF Sensex Next 50, Nippon India ETF Nifty ITNippon India Nifty Smallcap 250 Index FundNippon India Nifty Midcap 150 Index FundNippon India Nifty 50 Value 20 Index Fund, and Nippon India Nifty Pharma ETF.

Fund Outlook – Nippon India Nifty Auto ETF

Nippon India Nifty Auto ETF aims to provide returns that closely correspond to the total return of benchmark Nifty Auto Index subject to tracking errors. The underlying benchmark Nifty Auto Index reflects the behaviour and performance of the automobiles segment of the financial market.

The scheme offers investors an opportunity to invest in stocks of the companies that are market leaders of the auto and auto ancillary business and comprise the underlying benchmark index. The automobile sector closely follows various phases of the economic cycle, as it is cyclical and may be affected due to macroeconomic changes in the future.

The automobile sector has not been performing well for the past few years due to the uncertainties caused by the pandemic, which led to a decline in demand. It was amongst the worst hit sectors amid pandemic. But as the economy started opening up gradually, the sector too has recovered. Currently, the sector is witnessing a growing push for clean energy and environment; ethanol blending and Electric vehicles are themes driving auto stocks in the next few years.

However, do note that the demand level to rise back to normal may take a while due to the looming threat of the Delta plus the Omicron variant that has led to the rapid rise of COVID-19 cases in India and many parts of the world, posing a major risk to economic growth. In the near term, the automobile sectors may remain under pressure and witness higher volatility.

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. The underlying sector’s performance of the NIFTY Auto Index will determine the success of Nippon India Auto ETF. As a result, it’s a very high-risk investment proposition and suitable for investors with over 5 year investment time horizon.

This article first appeared on PersonalFN here

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