Which Mutual Fund Sectors Should You Invest In After Modi 3.0 Comes Into Effect?

After Jawaharlal Nehru, Narendra Damodardas Modi is now the third longest-serving prime minister of India since 2014. Investors are racing to determine which industries would gain the most from the formation of the Modi 3.0 cabinet with India's "Viksit Bharat" vision so they can develop an effective SIP strategy. Experts in the market believe that the Modi government will concentrate its efforts on infrastructure, manufacturing, defence, railways, waterways, logistics, exports, and PSU banks among other important sectors after the country's GDP for FY 2023-2024 was 8.2%, the highest among developed and peer economies worldwide.

According to experts, investing in mutual funds is advantageous for long-term investors, so those with a three- to five-year time horizon may find them attractive. Currently, large- and mid-cap companies appear to be reasonably attractive from a risk-reward standpoint, and mutual funds that focus on sustainable development, infrastructure, clean energy, and housing are likely to see growth in light of the government's increasing emphasis on these sectors. Below are the industry experts, who have suggested sectors which may be beneficial for mutual fund investors to invest in after Modi 3.0 is in place.

Expert: Trideep Bhattacharya, President & CIO- Equities, Edelweiss MF

We believe active stock-picking across market-capitalization ranges, that offer a combination of valuation comfort and earnings resilience in sectors like real estate, power, NBFCs, and defense, are the likely hunting ground for winners in Modi 3.0. A well-diversified 'multi-cap' portfolio that includes stocks from large, mid, and small-cap segments, could be a prudent choice for investors looking to navigate through current volatile markets.

Rajesh Bhatia, Chief Investment Officer, ITI Mutual Fund

India is in the midst of a strong multi-year bull market. With the continuation of the current government with a status quo in the leadership of key ministries, we expect the continuation of existing supportive policies which have emphasised strong capital expenditure growth and prudent fiscal management. India's GDP grew by grew by 8.2% in FY2024, making it the fastest-growing economy of its size in the world.

Sectors that we like the most.

Capital Goods - The multi-year capital expenditure cycle is in the early stages. The capital goods sector will benefit from the multi-year growth in investments. The sector includes Electrical equipment, Plant equipment, Earthmoving/ Mining machinery, power gensets, Heavy electric equipment's etc, that would be benefitting from govt's higher infra push and schemes like PLI (Postal Life Insurance).

Textiles - The textile and clothing industry is India's second-largest source of employment with 4.5 billion workers. It accounts for 2% of India's GDP, 7% of industrial production, and 11.4% of exports.

Auto - Automobile contributes ~6% to India's GDP and 35% of the manufacturing GDP. The EV (Electronic Vehicle) market is expected to grow at CAGR (Compounded annual growth rate) of 49% between 2022-2030 and is expected to hit 10 Mn-unit annual sales by 2030.

Chemicals - The Indian chemicals sector stands is among the rapidly advancing industries globally. It has attained the status of being the sixth-largest chemical producer, with a market size of $178 billion in 2021.

Realty - According to Savills India, real estate demand for data centers is expected to increase by 15-18 million sq. ft. by 2025. PM AWAS Yojana, 100% FDI for townships and settlements development projects are impetus to this sector's growth.

Utilities - It includes companies involved in power (generation and distribution), infra development and operations, gas distribution, and capital goods in non-electrical equipment all of which are direct beneficiaries of various government schemes like green energy initiatives, electricity for all & infrastructure development.

Construction & Construction Materials - Rapid Road, railway & airport construction consequently contribute to the growth of construction & construction materials.

Data Source - Internal Research, Bloomberg, Motilal Oswal Report

We would advise the investor to consult with their financial advisor for the suggestion of the funds as they would be able to suggest funds depending on their risk profile.

Expert: Gaurav Goel (Entrepreneur, SEBI registered Investment Advisor)

The new Government in India is in place. We say new but nothing much has changed. Most of the ministries are old. Continuity will be the hallmark of this government in many ways. However, we do believe that the Government will work with enthusiasm and greater resolve to achieve its objectives.

The Indian economy is currently firing on all cylinders. The last GDP print for FY 2023-24 was 8.2% which is highest amongst all global peer economies as well as developed economies. The beauty of this growth is that the Indian GDP trend is likely to grow in similar fashion for the next several years.

Amongst the key sectors, the Modi government will work unabated on the infrastructure, manufacturing, defence, railways, waterways, logistics, exports and PSU banks with absolute laser focus. While the stock market performance of these sectors has been noteworthy and valuations have moved up, yet the prospects of growth are so huge that we still find these sectors from the next 5 years perspective extremely attractive.

From a valuation perspective, we find large cap stocks more attractive than mid and small cap stocks. In the mid and small cap sectors, stock selection is extremely critical. Hence while choosing a mutual fund, it is important to select a good fund manager.

There are a number of factors which are important to consider before selecting the right schemes. One of the important factors is the historical return. Generally, people look at point to point returns. However, we prefer rolling returns as they provide a more realistic return perspective. We also pay a lot of emphasis on the fund manager, fund house, liquidity and risk ratios like Sharpe, Treynor and Sortino.

Our top 5 choices in this category based on our analysis are:

1. Parag Parikh Flexi Cap Fund
2. Nippon India Top 100 Fund
3. Quant Large and Midcap Fund
4. Quant Small Cap Fund
5. Invesco India Financial Services Fund

Expert: Sanjay Bembalkar Co-Head - Equity at Union Asset Management Company Private Limited

We believe, at present, large caps are looking relatively attractive from a risk-reward perspective. Thus, investors who have an investment horizon of 3 plus years can consider schemes investing in large caps such as schemes falling under categories like Large Cap and Large and Mid-cap.

Expert: Chakravarthy V., Cofounder and Director, Prime Wealth Finserv Pvt Ltd

With Narendra Modi's third term as Prime Minister, several mutual fund sectors are expected to thrive due to continued government focus on infrastructure, economic reforms, and digital transformation. Several sectors that an investor can invest during this time are:

Infrastructure Funds: Major projects like Bharatmala and Sagarmala will drive growth. Consider HDFC Infrastructure Fund and ICICI Prudential Infrastructure Fund for robust returns.

Banking and Financial Services Funds: Economic reforms and digital banking initiatives will benefit funds like SBI Banking & Financial Services Fund and Invesco India Financial Services Fund.

Consumption Funds: Rising consumer spending driven by economic growth supports funds like ICICI Prudential Bharat Consumption Fund and SBI Consumption Opportunities Fund.

Technology Funds: Digital India initiatives and tech sector growth make funds like Franklin India Technology Fund and Tata Digital India Fund promising.

Healthcare and Pharma Funds: Government healthcare programs and increased demand for medical services boost funds like Nippon India Pharma Fund and SBI Healthcare Opportunities Fund.

Investing in these sectors can align your portfolio with government policies and economic growth trends, offering the potential for substantial gains.

Expert: Harsh Gahlaut, Co-founder and CEO, FinEdge

With the new NDA government, we are confident that there is going to be continuity of policy and decision making like the previous two terms. The government would be harnessing India's potential to become a manufacturing hub and hence would allocate larger investments for sectors like infrastructure, defense manufacturing, renewable energy, airport & port infrastructure etc.

In the past 10 years, India has witnessed a secular bull run and outperformance across all sectors. Hence, a pragmatic approach would be to diversify investments in Flexi Cap and Large Cap funds. If one does have a more aggressive risk profile and a longer investment horizon, a mid or a small cap fund could be suitable as well.

Some Funds that can be considered and their ideal tenor:

* Franklin India Flexi Cap Fund - 5 years +
* ICICI Prudential Blue Chip Fund - 5 years +
* HDFC Mid Cap Opportunities Fund - 7 years +

Expert: Edul Patel, CEO of Mudrex

Given the new government's focus on sustainable development, infrastructure, clean energy, and housing, mutual funds targeting these sectors are likely to see growth. Investors should assess their risk tolerance before committing to these funds. Diversification remains crucial to balance risk and optimize returns, ensuring a well-rounded investment strategy across various sectors for optimal results.

Expert: Suman Bannerjee, CIO, Hedonova

We believe that investing in mutual funds focused on Public Sector Units (PSUs), Infrastructure, and Manufacturing sectors is a strategic choice following Modi 3.0, given the government's emphasis on economic growth and development. PSUs are set to benefit from continued reforms and divestment strategies, making funds like SBI PSU Fund and Kotak PSU Bank ETF attractive options.

Infrastructure is a pivotal sector, with initiatives such as Smart Cities and Bharatmala promising significant growth, making ICICI Prudential Infrastructure Fund and Nippon India Power & Infra Fund solid investments. The Manufacturing sector, bolstered by the 'Make in India' initiative, aims to transform India into a global manufacturing hub, making DSP India T.I.G.E.R. Fund and Franklin Build India Fund excellent choices. These sectors are poised to thrive under the continued pro-growth policies, offering robust investment opportunities.

Expert: Jayaprakash K, Chief Growth Officer, altGraaf

Recent post-election uncertainty caused stock market volatility, reflecting investors' worries over the market's performance in this year. To navigate similar uncertainties in the future, it is important both early and seasoned investors diversify their portfolios beyond stocks and mutual funds.

Fostering financial literacy, increased technology penetration within the country, and a wealth creation mindset will empower future investors. The government has already initiated several policies that support this movement. We expect this trend to continue in the new regime.

Expert: Kirang Gandhi personal financial mentor

The market outlook following Modi's third term is generally positive, with expectations of robust growth across various sectors. Continued government focus on infrastructure projects, digitalization, and financial reforms should drive significant investment opportunities. Key sectors like technology, renewable energy, and healthcare are likely to benefit from supportive policies and increased demand. Additionally, consumer goods and services, manufacturing, and rural development are poised for growth amid economic recovery efforts. Overall, a diversified investment approach could yield favorable returns in this environment.

However, based on historical trends and the likely continuation of certain policies, here are some sectors that might be promising:

1. Infrastructure :

Reason: The Modi administration has emphasized infrastructure development through initiatives like Smart Cities Mission, AMRUT, and the Bharatmala and Sagarmala projects.

Funds to Consider: Infrastructure funds.

2. Banking and Financial Services:

Reason: Continued focus on financial inclusion, digital banking, and the formalization of the economy can boost this sector.

Funds to Consider: Banking sector funds, Financial Services funds.

3. Technology and Digital:

Reason: Push for Digital India, increased adoption of technology, and support for start-ups and tech companies.

Funds to Consider: Technology sector funds, Innovation funds.

4. Healthcare and Pharmaceuticals:

Reason: Increased focus on healthcare infrastructure, pharmaceutical exports, and schemes like Ayushman Bharat.

Funds to Consider: Healthcare sector funds, Pharma funds.

5. Energy and Renewable Resources:

Reason: Emphasis on renewable energy, self-reliance in energy production, and schemes like the National Solar Mission.

Funds to Consider: Energy sector funds, Renewable Energy funds.

6. Consumer Goods and Services:

Reason: Rising middle class, increased consumer spending, and focus on rural development.

Funds to Consider: Consumer Goods funds, FMCG funds.

7. Agriculture and Allied Sectors:

Reason: Continued support for agricultural development, rural economy, and schemes like PM-Kisan.

Funds to Consider: Agriculture sector funds, Rural Development funds.

8. Defence and Aerospace:

Reason: Increased defence spending, focus on indigenization, and Make in India initiatives.

Funds to Consider: Defence and Aerospace funds.

Diversification and Risk Management:

While focusing on these sectors, it's essential to maintain a diversified portfolio to mitigate risks. Consider investing in a mix of sector-specific and diversified equity funds, along with some exposure to debt funds for stability.

Monitoring and Adjustments:

Keep an eye on policy changes, economic indicators, and global market trends. Be prepared to adjust your portfolio based on new developments.
When selecting mutual funds, it's important to:

Diversify across sectors to mitigate risk.

Consider your investment horizon, risk tolerance, and financial goals. Consulting with experienced personal financial experts can also help tailor your mutual fund investments to align with the current economic landscape and your personal financial objectives.