The "Make in India" and Manufacturing Thematic Funds: What’s Driving Investor Interest

Research shows that India’s manufacturing sector is expected to grow between 2025 and 2030. Government policies, rising domestic demand, and infrastructure development are encouraging companies to increase manufacturing operations in India. At the same time, global companies are looking “beyond China” for manufacturing expansion, and India is emerging as an alternative. 
(Source: Economic Times)

For more clarity, let’s check out the major sectors potentially expected to play a major role in India’s manufacturing growth by 2030:
 

(Source: Economic Times)

Recently, the government has approved PLI schemes across 14 sectors with total outlays exceeding ₹1.97 lakh crore. These schemes attract investment commitments of more than ₹8 lakh crore. 
(Source: Economic Times)

Infrastructure projects such as the Delhi–Mumbai Industrial Corridor, Chennai–Bengaluru Industrial Corridor, freight corridors, ports, and logistics networks are now also helping manufacturing companies improve connectivity and reduce transportation costs. 

Additionally, state governments are also competing to attract manufacturing investments through:

• Industrial parks

• Land support

• Digitised approvals, and

• Electricity subsidies 
  (Source: Economic Times)

Together, these developments have created a potentially favourable environment for investment in India’s manufacturing sector. Many investors are now turning to manufacturing mutual funds to participate in the sector’s long-term growth potential. 
(Source: The Financial Express). 

In the next section, let’s understand what they are.

Manufacturing funds are thematic equity funds that invest at least 80% of their total assets in equity and equity-related instruments of companies operating in the manufacturing sector of India. 

During periods of industrial expansion, higher CAPEX, rising exports, and supportive government policies, manufacturing companies may witness potential growth in revenue, production capacity, and profitability. In such market conditions, manufacturing mutual funds may potentially perform better as the underlying companies participate in sectoral growth.

However, such thematic mutual funds also carry “sector-specific” risks. Since manufacturing mutual funds invest primarily in one theme, their performance can be negatively influenced by:

• Economic slowdowns

• Weak industrial demand

• Raw material price fluctuations

• Adverse policy changes

• Global supply chain disruptions, or

• Lower private sector investment

Due to limited sector diversification, manufacturing funds may experience higher volatility compared to diversified equity mutual funds.

Manufacturing funds may potentially suit investors who want exposure to India’s long-term industrial and economic growth story, but understand that this is a relatively higher-risk investment compared to diversified equity funds.

These funds may be considered by investors who:

• Have a long-term investment horizon, as the manufacturing sector is “cyclical” and its performance may move through phases of expansion and slowdown. 

• Are comfortable with higher volatility, as potential performance is linked to “one sector”, that is, manufacturing.

• Already have a diversified core portfolio and are looking for satellite exposure to sectoral themes.

However, note that these thematic funds may not be ideal for short-term investors or those with low risk tolerance. That’s because sector concentration can lead to volatility depending on economic cycles, commodity prices, and global demand conditions.

So now you know what manufacturing mutual funds are and their risk-return profile. If we were to revise, manufacturing funds are thematic equity schemes that invest at least 80% of their total assets in equity and equity-related instruments of companies operating in the manufacturing sector of India.

Such funds are closely linked to India’s industrial growth cycle and are influenced by:

• Rising domestic demand

• Initiatives like PLI schemes or the PM Gati Shakti project

• Increasing foreign direct investment (FDI) inflows into manufacturing

• Expansion of export opportunities, and more

Such thematic mutual funds may potentially deliver better returns than diversified equity funds when the manufacturing sector performs well, and economic conditions remain favourable. 

However, the same concentration that creates upside potential also increases risk. Due to sector-specific exposure, these funds can underperform or experience sharper NAV declines compared to broadly diversified equity funds during downturns or global slowdowns. 

Thus, investors may carefully assess their risk appetite, investment horizon, and portfolio diversification needs before investing in such thematic funds.

1. What are the biggest risks in manufacturing mutual funds?

   The primary risks include sector concentration and significant exposure to economic slowdowns and changes in government policies. 

   Since these funds invest at least 80% of their total assets in the manufacturing sector, any drop in industrial demand or global disruptions (say, US-Iran-Israel War) can significantly impact returns compared to broader equity funds.
    

2. Can manufacturing mutual funds give higher returns than regular equity funds?

   They may potentially deliver higher returns when the manufacturing sector performs well, supported by strong demand and policy initiatives. However, this outperformance is not consistent. In weak economic phases, they may underperform diversified equity funds due to their narrow sector exposure.
    

3. What type of investor should avoid manufacturing mutual funds?

   As per general industry understanding, such thematic funds are highly volatile and sector-specific and might not suit conservative investors. Also, investors with low risk tolerance and a short-term investment horizon may avoid such funds.