Barometric industries like FMCG, entertainment, housing and banking benefit from rising economic activity in all economies. Automakers are no exception to this. Till recently, the Indian auto sector was not an attractive space to be in. However, with rising incomes, widening participation in the economic growth and development along with rising aspirations has resulted into fuelling the demand for vehicles, making the sector a happening one. Global auto majors are charting out their plans to this lucrative market.

The auto sector is divided in various sub-segments. Two-wheelers, passenger cars and commercial vehicles are the traditional components of the sector. There are some emerging segments like multi-utility vehicles and auto ancillaries.

Though auto ancillaries have been present in India their performance was below global averages. However, with the advent of players like Bharat Forge things have changed considerably.

Indians have emerged as global suppliers, throwing open many investment opportunities. Auto ancillaries along with autos have made the Indian auto sector mark a footprint on the global map.

Identifying winners is a task in itself and a better way to get it done is to let professionals do it. There are two mutual fund schemes in the market that are dedicated to invest in the auto sector – UTI auto sector fund and JM auto sector fund. Both of them have completed three years since inception.

Over a period of one year the sector has been an underperformer. A close look at the chart reveals that the BSE Auto index with 21.7% returns has been an underperformer against the Sensex offering 54.6% returns. The auto index delivered the second worst performance next to BSE FMCG, which languished at the same level where it was a year ago. These funds, though are investing in the same sector, have shown diverse trends on various fronts. The UTI Auto fund has a corpus of Rs 62.85 crore as on June 29, 2007. The scheme is largely invested into heavyweights like Mahindra & Mahindra, Tata Motors and Maruti Udyog, totaling almost 42% of the entire assets under the scheme. The fund has delivered a modest return of 14.8% over last one year.

The JM Auto sector fund manages Rs 9.65 crore as on June 29, 2007. The scheme has Ramkrishna Forgings as its top holding and top 5 holding account for 45% of the assets under management. The fund has delivered a handsome 44.8% returns over one year. This amounts to a good amount of out-performance to the BSE Auto index. The fund, however, has delivered negative returns in Q1 CY2007.

The sector has experienced a slowdown in the recent past. Segments like two-wheelers are experiencing the heat. With the fuel costs rising and high interest rates, the demand for automobiles is increasing at a lower rate. The rising competition is eating into the margins of the players. The input costs are further reducing the headroom. The positive performance of the auto sector index and the funds is chiefly influenced by the recent rally in the stock market.

The sector may not be a frontrunner in the times to come. The same is expected to reflect in the auto sector fund performance. However, there are some who are upbeat on the sector as the interest rates are showing softening bias and the valuations of some of the stocks are looking attractive. Investors with risk taking ability can stay with the auto sector funds.

New investments, however, should preferably be considered post the market cooling off.