Mutual Funds Lift Bets on Auto Sector Amid GST Cuts and Festive Demand

Mutual funds are increasing their exposure to automobile stocks as supportive policies and festive season demand brighten prospects for the sector. The weight of auto stocks in mutual fund portfolios climbed to a 10-month high of 8.5% in August, according to a report by Motilal Oswal. This was up from 7.9% in June and 8% in July, marking the sharpest monthly rise among major sectors. The allocations have also surpassed the BSE-200 benchmark weight of 8%, with leading funds such as PPFAS and HDFC allocating over 11% to autos.

Mutual Funds Raise Auto Exposure to 10-Month High

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Buying was broad-based across large and mid-cap companies. Maruti Suzuki share price holdings rose 2.3% to 4.62 crore shares, Hero MotoCorp climbed 2.4% to 3.03 crore shares, while Bajaj Auto increased 2.4% to 1.91 crore shares. Mid-caps also gained traction, with Ashok Leyland shares up 4.4% to 44.82 crore and MRF inching 4.1% higher to 0.03 crore shares. The Nifty Auto Index has delivered a 28.7% gain in the past six months, boosted further by government tax reforms.

GST Cuts and Festive Season Act as Key Catalysts

The reduction in GST rates on vehicles has acted as a key catalyst. Taxes were lowered from nearly 28% plus cess to 18% for most vehicles, while large SUVs now attract 40%. Two-wheelers up to 350cc also benefit from 18% GST, while premium motorcycles above that threshold face 40%. Experts believe the cuts will improve affordability and stimulate sales across segments.

Daylynn Pinto, Senior Fund Manager at Bandhan Mutual Fund, noted that lower loan EMIs, tax cuts and GST reductions were strong measures to lift consumer sentiment. He favours a mix of original equipment makers (OEMs) and ancillaries, especially companies with robust replacement demand or high entry barriers. Similarly, Vaibhav Shah, Auto Analyst at DSP Mutual Fund, expects the festive season to offset earlier weakness. He said the second half of the year could be materially stronger, particularly for entry-level cars, mid-size SUVs and premium motorcycles.

Valuations, Risks, and Long-Term Outlook

Valuations across the Nifty Auto Index remain varied. Tata Motors trades at 12x, while Mahindra & Mahindra and Maruti Suzuki command 24x and 29x, respectively, after one-year gains of over 30%. Analysts consider these valuations fair compared to other consumer sectors, noting that auto ancillaries trade at higher multiples due to strong earnings expectations and operating leverage. The sector also enjoys a premium over the Nifty 50, which trades at 20x, compared with 23.85x for Nifty Auto.

Looking ahead, fund managers expect company-specific triggers, festive demand, pay commission hikes, and income-tax cuts to drive further upside. While external risks such as U.S. tariffs exist, analysts highlight that Indian OEMs have limited exposure to the U.S. market, with ancillary exporters facing more impact. Growth opportunities in SUVs and electric vehicles remain key focus areas for the future.

Conclusion

The auto sector is witnessing renewed interest from mutual funds, fuelled by GST cuts and festive demand. With earnings upgrades likely in FY26–27 and strong sectoral support, autos are expected to remain in focus for both domestic and global investors.