'They are a poor fit for anyone with near-term goals, low volatility tolerance, or a need for steady income or liquidity.'
'First-time investors should typically avoid them.'
Manufacturing funds have been in limbo over the past year as global uncertainties and tariff wars hurt sentiment.
Over the one year ended October 20, 2025, these schemes lost 0.8 per cent on average.
However, with reports of a possible trade deal with the United States on better terms for India, the segment could see renewed investor interest.
"Manufacturing funds can be powerful wealth builders. They ride multi-year capex upcycles, China-plus-one, production-linked incentive (PLI) schemes, and consolidation that boosts pricing power," says Bhalachandra Shinde, assistant fund manager, Motilal Oswal Asset Management Company.
"Small revenue upticks can translate into outsized profit growth via operating leverage. They will also benefit from formalisation, localisation of supply chains, and, in export niches, tailwinds from a competitive rupee," Shinde adds.
"Investing in manufacturing funds offers exposure to one of the strongest structural growth stories in India, driven by policy incentives, supply-chain diversification, and rising exports," says Ravi Kumar T V, founder, Gaining Ground Investment.
These funds invest at least 80 per cent of their corpus in companies engaged in manufacturing activities.
Nineteen such schemes across fund houses managed assets worth Rs 34,430 crore as on September 30, 2025.
Multiple growth drivers
This is a diversified theme that spans sectors such as automobiles, pharmaceuticals, consumer staples, white goods, capital goods, materials, chemicals, fertilisers, and industrials, and covers companies across large-, mid-, small-, and micro-cap segments.
The government's focus on Atmanirbhar Bharat, major infrastructure investments, relatively low interest rates, and the Goods and Services Tax (GST) reduction have created conditions for stronger domestic demand, which should benefit manufacturing firms.
Government initiatives could provide a leg-up to the export sector.
"The government has also increased its efforts to diversify trade. The India-European Union (EU) Free Trade Agreement and the India-European Free Trade Association (EFTA) trade pact will help manufacturers access premium markets in the EU. India's ongoing efforts towards policy predictability and infrastructure improvement continue to attract foreign direct investment into manufacturing," says Ankur Punj, managing director and business head, Equirus Wealth.
Global trade tensions also offer opportunities.
"While global trade uncertainty has made the near-term outlook fluid, it could set the stage for a strong revival once conditions stabilise. Over the next one to two years, as clarity returns, renewed capex and policy support can drive growth -- making this an attractive long-term entry point for investors," says Renjith Sivaram, equity fund manager, Mahindra Manulife Mutual Fund.
Consider the risks
Investors should be cognisant of the risks within this theme. "Any sectoral fund carries substantial cyclical and sector-specific risk," says Punj.
They also carry high concentration risk. "Any news in the sector -- global or domestic--can lead to substantial volatility in fund performance," adds Punj.
"The main risk at present lies in global trade and tariff volatility, which can affect exports and capacity expansion," says Sivaram.
Hold in satellite portfolio
Experts advise limiting exposure to manufacturing funds within the satellite portfolio. They are suitable for experienced investors with a long-term horizon.
"They are not meant for the core portfolio. If you have a high risk appetite, 5 to 10 per cent of the portfolio could be in manufacturing funds. Take the systematic investment plan (SIP) route with a 5 to 10-year horizon," says Ravi Kumar.
Some investor profiles should avoid these funds.
"They are a poor fit for anyone with near-term goals, low volatility tolerance, or a need for steady income or liquidity. First-time investors should typically avoid them. If you can't sleep through a temporary drawdown, this category isn't for you," says Shinde.
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Feature Presentation: Aslam Hunani/Rediff
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