Semiconductor Mutual Funds: Invest in the Chips That Power the World

Several industries have gained attention in recent years due to their large contributions to India's GDP. Among these, the semiconductor industry is one of the sectors thriving to contribute to India's success story.

India is home to over 200 semiconductor design and embedded software firms, according to a report by the India Brand Equity Foundation (IBEF); thus, an opportunity is currently being presented.

You see, the automation concept propels the world to unimaginable heights. Now, everything that used to take hours or even days can be finished in a matter of minutes, thanks to technological breakthroughs.

Having said that, the widespread use of 5G technology, the rising popularity of cryptocurrency mining, which requires more processing power, and the government's ongoing push for digitalisation have all collectively contributed to an increase in the demand for semiconductor products.

What Is a Semiconductor?

Nowadays, we have unrestricted access to everything. Electric scooters, foldable smartphones, and even supercomputers are coming soon. However, all of these electrical devices can be made functional with a little technological chip; these tiny chips are known as semiconductors, a substance that manages and controls the flow of electricity in electrical devices and equipment. As a result, it neither completely repels electricity nor permits the aggressive, uncontrolled flow of electrons in a gadget. It is a substance that significantly reduces electrical resistance, making it simple to modify a machine's temperature.

The 'brains' of contemporary electronics and semiconductors are necessary for producing anything from basic consumer goods like automobiles, televisions, refrigerators, washing machines, personal computers, laptops, and smartphones to more complex machinery used in industrial, defence, and aerospace applications.

Electronic devices are getting smaller, faster, more dependable, and more efficient thanks to developments in semiconductor technology. As a result, semiconductor manufacturers are in a competitive race to produce the tiniest chips they can.

The Indian Government has introduced several initiatives and regulations to recognise the importance of the semiconductor sector. The 'Make in India' project, launched in 2014, seeks to increase manufacturing in India and position the nation as a centre for global manufacturing.

[Read: Top 5 Mutual Funds That Are Betting on the Manufacturing Boom]

The Production Linked Incentive (PLI) scheme for the electronics industry is one of many programmes that have been introduced to encourage the manufacturing of semiconductors. These regulations will not only help semiconductor manufacturers but also to businesses engaged in producing semiconductor-related components.

Government Measures to Boost the Growth of Semiconductors in India...

With the advent of the pandemic, the demand for semiconductors increased immensely, but supply problems led to a global shortage. Various sectors of the Indian economy have been impacted by the global shortage and supply issues with semiconductors.

The government has implemented the following efforts to overcome the scarcity and better prepare for chip demand:

• The Production Linked Incentive (PLI) plan of the government has set aside Rs 76,000 crores for the manufacturing of semiconductors and displays. Of the sanctioned money, Rs 2.3 lakh crore is set aside to support local semiconductor production.
• At the moment, India imports practically all of the semiconductors it needs. The Indian Government also unveiled a ‘Semicon India Programme’ in December of last year to lessen its reliance on imports and assist in resolving the global chip problem.
• To qualified manufacturers, the government has provided financial assistance of up to 50% of the project's cost. International chip makers were allowed to submit ideas, and firms including TSMC, Foxconn, Fujitsu, Intel, and AMD had expressed interest.
• In order to support the industry, the government has also implemented the Design Linked Incentive (DLI) Plan and other programmes, including Chips to Startup (C2S) and the Scheme for Promotion of Electronic Components and Semiconductors (SPECS).
• One of the newest government-industry initiatives lowering barriers to entry for fabless enterprises is the Semiconductor Fabless Accelerator Lab (SFAL) in Karnataka.

India is seeking foreign investments for its indigenous semiconductor industry to develop and design fabs, ATMP (assembly, testing, marking, and packaging), and facilities. According to an official statement issued by the Ministry of External Affairs, it was announced that Prime Minister Narendra Modi has invited 'Micron Technology' to boost semiconductor manufacturing in India.

Reuters has reported that Micron's USD 2.7 billion investment plan to establish a semiconductor ATMP (assembly, testing, marking, and packaging) facility in Gujarat has received permission from the Indian cabinet. The advanced semiconductor assembly and testing facility for Micron Technology will be built by TATA Projects in Sanand, Gujarat. By December 2024, the facility's initial phase is expected to start producing packaged chips.

Overview of Indian Semiconductor Market

The semiconductor market is greatly influenced by several end markets, such as automotive, consumer electronics, telecommunication, and industrial equipment markets. Historically, the semiconductor market has a cycle of high and low revenue growth, mainly due to swings in demand.

Over the past two decades, the semiconductor market share has significantly shifted from American and European countries to Asian countries due to the increased electronic equipment production in these countries. Currently, China continues to be the world's largest consumer of semiconductors.

In 2022, the Indian semiconductor industry reached a value of USD 27 Billion, with over 90% of its requirements being met through imports, which exhibits a heavy reliance on foreign sources on the part of Indian chip buyers. This is very similar to other key markets like the USA and the EU, which rely heavily on imports, particularly from Taiwan and China, where there is a significant concentration of semiconductor manufacture.

The Indian semiconductor industry is anticipated to reach USD 55 billion by 2026, with more than 60% of the market being accounted for by computers and data storage, wearables and smartphones, and automotive components.

However, as the country's semiconductor demand continues to grow rapidly, meeting this demand could be challenging. As a result, there is an urgent need to enhance the pool of skilled manpower to support this industry.

India, with its population of over 1.4 billion and robust education system, has the potential to become a talent powerhouse in the semiconductor industry and help alleviate the acute shortage of skilled professionals.

Further, the Ministry of Electronics and IT (MeitY) has also announced a USD 10 billion investment in the India Semiconductor Mission (ISM), reflecting the government's ambition to gain a foothold in the semiconductor sector. This is done to promote semiconductor research and development (R&D) in India.

In an overall context, it is anticipated that the semiconductor industry would expand more quickly in the coming years due to the rising demand from end-user industries such as industrial machinery, automobiles, telecommunications equipment, office automation, among others for computing purposes.

The next stage of the digital revolution under Industry 4.0 is being driven by semiconductors, which are at the heart of modern electronics. In order to put India on the map of the world, the government and industry must work together as global chip demand and semiconductor innovation both continue their unabated upward trend.

On the contrary, do note that the market will continue to be cyclical for the next few years due to major swings in the demand and supply capabilities caused by the ongoing war, energy crisis, and inflation. These factors, among others, could have an impact on the performance of the semiconductor sector.

All things considered, the demand for semiconductors will continue to rise in the years to come. The aforementioned considerations make investment in semiconductor stocks a lucrative option for savvy investors seeking to invest in evolving sectors.

Semiconductors have recently gained traction all around the world. Consequently, semiconductor stock prices are currently in the news.

Here is a list of mutual funds that you might want to look at if you want to invest in the growing semiconductor market. These mutual funds hold a significant exposure to top semiconductor stocks:

#1 - Taurus Tax Shield Fund (ELSS)

Taurus Tax Shield Fund aims to form a diversified portfolio of equity and equity-related securities across all market capitalisations. It is a tax-saving equity mutual fund with a lock-in period of 3 years.

It invests across the market cap, and as of August 2023, it holds 57.42% allocation in large caps, 10.26% allocation in mid-caps and 24.23% in small caps. The scheme holds an overall allocation of 8.65% in Semiconductor stocks of HCL Technologies Ltd. It is a multinational IT and consulting company.

Furthermore, this company has an investment of USD 825 million in the country for an Outsourced Semiconductor Assembly and Test (OSAT) plant at Sanand in Gujarat. The cumulative investment in the project is set to reach USD 2.75 billion.

HCL Technologies is amongst the top 3 stock holdings of the scheme. This scheme is mainly suitable for Individuals who wish to avail tax benefits from their investments under Section 80C of the Income Tax Act, 1961. Ensure your suitability to the fund before considering any investment.

#2 - Aditya Birla SL Digital India Fund (Sectoral Fund)

ABSL Digital India Fund aims to build a portfolio with a target allocation of 100% equity, focusing on investing in technology and technology-dependent companies, hardware, peripherals and components, software, telecom, media, internet and e-commerce and other technology-enabled companies.

As of August 2023, the fund has an allocation of 59.68% in large-cap stocks, 13.09% in mid-cap stocks and 17.51% in small-cap stocks. Due to its sizeable exposure to small caps, which are considered highly risky, one must consider their suitability based on risk appetite and investment horizon.

The scheme holds an overall allocation of 7.71% in Semiconductor stocks of HCL Technologies Ltd., the market leader of the segment. HCL Technologies is amongst the top 5 stock holdings of the scheme's assets.

#3 - Tata Digital India Fund (Sectoral Fund)

Tata Digital India Fund aims to provide long-term capital appreciation by investing predominantly in equity/equity-related instruments of the companies in the Information Technology Sector in India.

The scheme invests across market cap, and as of August 2023, it holds a major allocation of 72.53% in large caps, 10.37% in mid-caps, and 10.78% in small caps. Currently, the scheme has an AUM of Rs 7862.86 crore, and it has an overall allocation of 7.43% to Semiconductor stocks.

The scheme holds this allocation only in stocks of HCL Technologies Ltd., which is amongst the top 5 holdings of the fund. The business offers the semiconductor equipment manufacturing industry to stay ahead by understanding customers' needs and optimising R&D spending.

#4 - NJ ELSS Tax Saver Scheme (ELSS)

Launched a few months back in June 2023, the NJ ELSS Tax Saver Scheme aims to offer capital appreciation by forming a diversified portfolio by investing predominantly in equity and equity-related securities across market capitalisations.

Do note it is a tax-saving equity mutual fund with a lock-in period of 3 years. Being an ELSS, this scheme is mainly suitable for Individuals who wish to avail tax benefits from their investments under Section 80C of the Income Tax Act 1961. Ensure your suitability to the fund before considering any investment.

The scheme invests across market caps with an allocation of 46.16% to large caps, 37.72% to mid-caps and 20.30% to small caps as of August 2023. The scheme holds an overall allocation of 7.20% to the Semiconductor stocks.

This includes a 3.76% allocation to HCL Technologies Ltd. and 3.44% to Tata Elxsi Ltd. The company is a global leader in technology design and services and has collaborated with Renesas Electronics Corporation, a pioneer in advanced semiconductor technologies, to build a cutting-edge design centre in Bangalore.

Bear in mind that the scheme is new in the market and does not carry a long performance track record; thus, investors may consider their suitability before investing in it.

#5 - ICICI Pru Technology Fund (Sectoral Fund)

ICICI Pru Technology Fund aims to generate long-term capital appreciation by creating a portfolio invested in equity and equity-related securities of technology and technology-dependent company companies. The scheme has an AUM of Rs 11,158.89 crore and is benchmarked against Nifty 50 TRI.

The scheme holds an overall allocation of 6.98% in semiconductor stocks of HCL Technologies Ltd., which is amongst the top 5 stock holdings of the fund. As of August 2023, the scheme holds a high allocation of 71.44% to large-cap stocks, 10.94% and 10.52% in mid and small-cap stocks, respectively.

Bear in mind that allocation to such thematic/sectoral mutual fund schemes should be restricted and aligned to your risk appetite, as they carry a high concentration risk and may have a negative impact if the sector goes out of favour.

*(All the scheme related data is collated by PersonalFN Research, Source: ACE MF)

To conclude...

India has advanced significantly in the semiconductor sector in recent years, becoming one of the top nations with a pool of highly qualified semiconductor design experts.

The rise of electronic manufacturing will be supported by the expansion of the semiconductor value chain. These favourable government injections will usher in a new era in electronics manufacturing by providing enterprises with a globally competitive incentive package to companies in the semiconductors space.

These actions will thereby promote higher domestic value addition in the electronics manufacturing industry and significantly aid in the achievement of a USD 1 trillion digital economy and a USD 5 trillion GDP by 2025.

Do note that the semiconductor ecosystem is at a nascent stage and would require time to create, maintain, and grow, despite the government's strong efforts to make India a worldwide semiconductor hub.

This article first appeared on PersonalFN here

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.