Tata Nifty India Tourism Index Fund NFO review

Tata Mutual Fund launched the Tata Nifty India Tourism Index Fund on July 8, the first fund to focus solely on travel and tourism companies. The fund, aiming to capitalise on India's growing appetite for travel, will stay open for investor subscription until July 19, 2024.

About the fund and the index it will track

• The Tata Nifty India Tourism Index Fund is an index fund, meaning that it will invest in the companies listed on the Nifty India Tourism Index in the same proportion. So, if company A has a 5 per cent allocation on the tourism index, the Tata Fund will also try to invest a similar percentage of investors' money in that company.
  
• The tourism index includes 30 travel and tourism companies listed on the Nifty 500.
  
• The maximum weight of constituents of Nifty India Tourism is 20 per cent. Simply put, none of the companies on the index can comprise more than 20 per cent of the index.
  
• Last but not least, the index will re-evaluate the companies twice a year. The index is reshaped every six months based on each company's current free-float market capitalisation.

Why it is launching a tourism fund

This will be the 55th sectoral/thematic fund launched this year. This increase is mainly because fund houses can unroll unlimited sectoral/thematic funds, while they are restricted to only one active fund per category.

Secondly, India's travel and tourism industry has been on an upward curve. Having contributed $199.3 billion to the economy in fiscal 2023, this sector is expected to compound annually between 7 and 9 per cent until 2030, as per World Travel and Tourism Council.

This industry is poised for higher revenue growth due to the following reasons:

• Rising disposable incomes
  
• More frequent travel
  
• Larger share of spending on vacations
  
• Improved road and rail infrastructure
  
• A young population (mostly 20 to 45-year-olds)
  
• Increased internet access

Potential risks

The tourism index is highly concentrated. While the tourism index aims to represent the broader market, it currently is home to just 17 companies, of which the top five companies account for a substantial 73 per cent of the index.

Why is this bad? A highly concentrated index (like the tourism index) is potentially more volatile and riskier than diversified funds since it is reliant on the performance of just a handful of companies.

There's not much to write about the index's long-term performance either. Apart from the last 18-odd months, the tourism sector has generally trailed India's broader equity market (Nifty 500) based on five-year rolling returns. (Do note that the tourism index data is back-tested, as it's a new index.)

Should you invest?

As mentioned earlier, the tourism index is highly concentrated (read: risky) and has usually underwhelmed on the performance front.

Instead, you should look at diversified equity funds such as multi-cap and flexi-cap funds (find our handpicked list here ) because they also invest in travel and tourism companies.

But if you must invest in India's first tourism fund, we suggest you invest only a small percentage of your money here.

Also read: Ask these three questions before investing in an NFO