Tata Asset Management, India’s 11th biggest mutual fund house, has launched an open-ended passive scheme that will take exposure to travel, tourism and hospitality businesses. This is the first domestic fund focused on the tourism theme.
The new fund offer (NFO) for Tata Nifty India Tourism Index Fund opened on July 8.
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What’s on offer?
The investment objective of the scheme is to provide returns that replicate the performance of the Nifty India Tourism Index (a total return index or TRI, which monitors capital appreciation as well as any dividend or interest income). The scheme will invest in the entire value chain of the tourism sector.
The eligible universe for the index entails Nifty 500 constituents belonging to travel and tourism-related industries such as hotels and resorts, tour and travel-related services, restaurants, airlines, airport and airport services, and manufacturers of trolley bags, suitcases and luggage. The index can consist of a maximum of 30 stocks with a weight cap of 20 percent to a single stock.
The fund manager to the scheme is Kapil Menon.
“There is the government’s thrust on road connectivity, infrastructure, railways, airports, airlines and religious tourism. Also, business, leisure and medical tourism are booming. We haven’t seen the current 70 per cent hotel occupancy in a long time. We are witnessing exponential growth in domestic aviation, hotels, restaurants and travel, which augurs very well for the tourism segment,” said Anand Vardarajan, chief business officer, Tata Asset Management.
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How is the index constructed?
The Tata Nifty India Tourism Index Fund currently comprises 17 stocks. In terms of stock weights, InterGlobe Aviation, the operator of the country’s largest airline IndiGo, has the highest weightage at 20.31 percent, followed by Indian Hotels, which runs the Taj group (19.26 percent), Indian Railway Catering And Tourism Corporation (13.31 percent), GMR Airports Infrastructure, the operator of the Delhi, Hyderabad and Goa airports (10.57 percent) and Jubilant Foodworks, which has the rights to the Domino’s and Dunkin’ Donuts brands, among others (9.54 percent).
Sectorally, consumer services has the highest weightage at 65.93 percent, services at 30.88 percent and consumer durables 3.19 percent.
In terms of industry weights, hotels and resorts has 32 percent exposure, followed by airlines (19 percent), restaurants (19 percent), tours, travel and related services (16 percent), airports and airport services (10 percent), and luggage (3 percent).
“Tourism is not a very crowded space right now, but there could be more names from the sector which could be listed in the future. We think that it would be better to bet on this sector by the entire index at this time. If you don’t know what to buy, buying the entire index makes more sense. It takes away the pressure for the investor to try to predict which company will do well,” said Vardarajan.
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What works?
Travel, hospitality and related business are in a sweet spot at this point. According to Euromonitor, Systematix Institutional Research, India’s travel and tourism expenditure is projected to soar from $140 billion in 2019 to $406 billion by 2030.
As per the fund house, India’s growing middle class is fuelling a surge in aspirational and experiential travel bolstered by significant investment in infrastructure, which has expanded air route capacities, making travel more accessible.
“All types of travel, be it a pilgrimage, business, medical or leisure, are registering a surge. This makes a compelling case for looking at tourism as a segment and how one could invest and aim to benefit from the growth of this sector,” said Vardarajan.
Also, backtesting of the data shows that theNifty India Tourism TRI has performed very well in recent times, posting a compound annual growth rate of 22.45 percent on a five-year basis.
What doesn’t work?
Just like any thematic or sectoral fund, the Nifty India Tourism Index is highly concentrated in a few stocks. Data shows that out of the 17 current picks, the top 10 stocks hold around 90 percent of the total weightage in the index.
Also, while more companies from the tourism sector are expected to list in the coming years, right now, the eligible universe under this theme constitutes a very narrow base. Also, the tourism sector in large part is highly fragmented and unorganised at this point.
Note that thematic and sectoral funds can undergo phases of underperformance. Data available with the National Stock Exchange of India (NSE) shows that the Nifty India Tourism Index underwent a long period of tepid growth from 2005 to 2020. The index only started to perform well from late 2020 onwards in the aftermath of the COVID-19 outbreak.
Moreover, on the back of a nearly fivefold rally in the last four years, the index looks pricey in terms of valuation. The price-to-earnings (P/E) ratio of the index stood at 58.42 as of June end.
What should investors do?
“The hospitality and tourism sector has done well over the last year or so, mainly due to revenge travel. This theme should be a multi-year approach, but the problem is that similar returns should not be expected in a short period of time. Now, the returns will be more gradual,” said Deepak Jasani, head of retail research, HDFC Securities.
For sure, tourism is one of the fastest growing sectors in India. However, due to the risky nature of sectoral/thematic funds, only experienced investors with high risk appetites, a bullish stance on the theme and an existing well-constructed portfolio should look to take a bet on the index fund.
Also, experts warn that investing in a narrow theme at this time can be risky given the market valuations.
“Further, most opportunities funds or multi-cap funds already try to capture all these ideas in their funds. Even consumption funds try to capture every aspect related to travel and tourism. A low-risk investor should avoid looking at a narrow, thematic approach in their portfolio as diversified funds can be a better bet,” said a mutual fund distributor on condition of anonymity.
Consider investing in a sectoral/thematic fund only if you hold a positive outlook on that specific sector or have reliable access to quality advice. For thematic funds, achieving profitability requires precise timing for both entry and exit points.
The NFO of the Tata Nifty India Tourism Index Fund will close on July 19.
