Tata MF launches housing fund with a heavy focus on building materials. Should you invest?

Amid rising interest rates that usually don't bode well for real estate growth, Tata Mutual Fund (Tata MF) has launched a housing fund, which is just the third fund in the category.

Tata Housing Opportunities Fund aims to take advantage of the demand revival in the housing sector. However, the thematic fund is not a pure-play bet on housing stocks but will cover a large set of businesses linked to the housing sector for generating higher returns.

With higher allocation to building materials, the Tata fund debuts at a time when the oldest fund in the category has not delivered reasonable returns yet. The new fund offer (NFO) opened on August 16.

The scheme

The fund will be benchmarked against the Nifty Housing Index, which comprises 50 stocks, but will invest in a larger set of stocks and businesses. It aims to take advantage of various factors that are reviving demand in the housing sector – lower prices, low home loan rates, higher urbanisation, low unsold inventory and new project launches.

What works?

Tejas Gutka, the manager of Tata Housing Opportunities Fund, says that unlike the benchmark index which is more infrastructure-focused, the fund will look to play the housing theme through a wide range of sectors. “We will focus heavily on the building materials sector, which could account for as much as 70 percent of our portfolio allocation.

Also read: ICICI Mutual Fund collects Rs 3,000 crore for housing opportunities fund

Also, the portfolio allocation will have sizeable mid- and small-cap stocks (around 40-50 percent allocation in initial portfolio), which is also where most of these businesses are,” Gutka said.

This is also where the fund differentiates from the housing index, which has 88 percent exposure to large-cap stocks.

Focus on mid- and small-cap stocks can help the fund deliver better returns when the broader markets rally.

Building materials would include businesses such as paints, tiles, ply, sanitaryware and cement. The fund would also take exposure to other sectors linked to housing such as housing finance, consumer electricals and banks.

What doesn’t?

The real estate sector can go through long business cycles, both on the upside and downside. The first and the oldest fund launched in the category – HDFC Housing Opportunities Fund – has not yet delivered reasonable returns. Since its launch in December 2017, the fund has given just 5.6 percent returns.

However, Gutka says that the focus on wider sectors such as building materials will help to curb the volatility. “These businesses can see reasonable growth rates, even if housing demand is going through a slowdown. This is because, for these businesses, there is a reasonable replacement demand,” he says. “In the last ten years, when real estate has not done anything, all of these stocks have delivered reasonable returns.

These businesses have grown their topline at anywhere between 12 per cent and 15 percent on the compounded annualised basis because there is a reasonable replacement demand, and there is a shift from unorganised to organised sector. The portfolio offers good upside participation to real estate as these companies will grow faster when real estate sees good growth, as well as downside protection,” he adds.

Rising interest rates are another concern, but Gutka says that the Reserve Bank of India has normalised interest rates to pre-Covid levels and the sharp upmove from here seems unlikely.

Financial planners say timing is critical when it comes to thematic or sector-based funds. “It is not the entry in such funds, but also timing your exit that can impact your investment returns,” says Amol Joshi, founder of Plan Rupee Investment Services.

Moneycontrol’s take

Diversified equity funds also allow fund managers to take sector or theme-based calls. But theme-based and sector-funds can be more concentrated bets. Such funds are more suitable for savvy investors who can enter and exit the fund at the right time. Savvy investors can consider investing some part of their portfolio in the fund after it builds a credible track record. The NFO closes on August 29.