Mutual Funds: Should you invest in the newly launched Tata Nifty India Tourism Index Fund?

The tourism sector in India is thriving due to the current government’s continued emphasis on improving infrastructure and enhancing connectivity. This has led to substantial growth, positioning tourism as one of the fastest-growing segments of the Indian economy.

Domestic tourism is fueled by Indians’ growing interest in exploring their diverse country to gain deeper self-awareness. The continuous movement of people across skies and seas to distant lands can be attributed to various factors, benefiting the tourism sector significantly. The launch of the Tata Nifty India Tourism Index Fund by Tata Asset Management Company on July 08, 2024, underscores the sector’s potential as a major business opportunity in the future.

For instance, according to the Ministry of Tourism, Government of India’s website, foreign tourist arrivals (FTAs) in May 2024 reached 600,496, compared to 598,480 in May 2023 and 615,136 in May 2019, reflecting a growth of 0.3% and a decrease of 2.4% compared to 2023 and 2019, respectively. During the period from January to May 2024, FTAs totalled 40,72,329, compared to 37,32,231 in January-May 2023 and 45,69,579 in January-May 2019. This represents a growth of 9.1% over 2023 and a decrease of 10.9% compared to 2019.

This fund is an open-ended passive scheme designed to invest in travel, tourism, and hospitality businesses. It is the first domestic fund dedicated to the tourism theme. The objective of launching this scheme is to deliver returns, net of expenses, aligned with the performance of the Nifty India Tourism Index (TRI), taking into account tracking errors. However, there is no guarantee that the scheme will achieve its investment objective. The scheme does not promise or assure any returns.

What is the tourism index fund about?

The newly launched fund provides diversification across multiple sub-sectors within the tourism industry, encompassing hospitality, travel services, leisure, and travel essentials. This strategy aims to mitigate risk and capitalize on growth opportunities across diverse segments of the tourism ecosystem.

The fund targets larger, established companies in the Indian tourism sector by concentrating on those within the Nifty 500 index. This approach aims to offer stability, which contrasts with the potential volatility of a portfolio focused solely on small-cap tourism stocks. Limiting individual stocks to a maximum weight of 20% in the index prevents excessive exposure to any single company, thereby enhancing diversification within the fund.

The tourism sector currently lacks saturation, and there may be additional companies from this sector that could be listed in the future. Many modern investors see this as an opportune moment to invest in the sector. Importantly, investing in the entire index is often preferred when uncertain about individual stock selection, relieving investors from the pressure of predicting which specific companies will perform well.

To invest or to not invest?

Is investing in the Tata Nifty India Tourism Index fund worthwhile? This is a common question among investors exploring thematic sectors through new fund offers (NFOs). The truth is, there’s no definitive answer. The principle of “to each, his own” governs investors’ decisions on where to allocate their funds to capitalize on market opportunities.

The appeal of this offer lies in its direct investment in the thriving Indian tourism sector, promising potentially high returns if the sector flourishes. Despite its focus on tourism, the fund diversifies its investments across multiple sub-sectors, thereby reducing the risk associated with the industry.

Given the absence of any other asset management company (AMC) launching funds in this sector, the redeeming feature of this fund is its investment in larger, established companies within the Nifty 500 index. This provides a degree of stability compared to smaller, more volatile firms. While past performance does not guarantee future returns, it does reflect the inherent stability of a sector and the long-term performance of a fund relative to its peers and competitors.

Investing in this mutual fund, which lacks a track record of performance and supporting growth statistics in its sector, may pose more risks than benefits. Before committing to any investment in the stock market, it is crucial to thoroughly evaluate its potential. Equally important is determining the appropriate level of investment and understanding when, where, and how to allocate your funds in the market.

Investing in a thematic fund, particularly one without a track record of performance, warrants careful consideration and patience. Given the sluggish growth of the sector compared to others, it’s prudent to pause and reflect before making a hasty decision.