ICICI Prudential has launched a Rural Opportunities Fund. The NFO is open till January 23 and aims to invest in rural or allied companies’ equity to benefit from rural transformation. The fund believes that after an improvement in quality-of-life metrics brought about by several policies that benefitted rural India, the next push will be to increase the share of manufacturing and services economy from agrarian dominated rural sector. The fund benchmarked to Nifty Rural Index will be investing in themes like automobiles, FMCG, and financial services to leverage the transformation. The fund’s launch time is suitable to ride the wave but secular headwinds in the form of valuations and demand growth should temper investor expectations. We lay down the fund drivers and benchmark comparison to evaluate the opportunity in the fund.

Fund drivers

The rural economy as expected has touched $2,000 per capita income in FY25 (urban at $4,270) and account for 50 per cent of the consumption. While agriculture still accounts for 60 per cent of the rural economy, it has declined from 76 per cent in the year 2000.

Government’s policy action has had an impact on improving the quality of life metrics in rural India. The Awaas Yojana – Gramin for houses, village electrification under Saubhagya, potable water connection through Jal Jeevan Mission, and Ujjwala Yojana for gas connections have improved daily life in the last mile. The Jan Arogya and Jan Aushadi missions have complemented these measures with improvement in healthcare access. The policies on road construction, education, hygiene, financial literacy and access to capital and employment have been an ongoing effort.

It is expected that the policy focus will shift to job creation and social welfare.  The budgeted outlay for capex had risen significantly to 22 per cent CAGR in the last five years. Under the new political mandate and tempered by need to rein in the fiscal deficit, the shift away from capex seems likely. This should allow focus on MSME creation and support to diversify employment creation, away from agriculture to manufacturing and services.

The NFO mentions areas of interest in a number of sectors to gain from the expected turnaround including, automobiles, cap goods, chemicals, construction materials, durables, FMCG, financial services, power, telecom and agri products.

Benchmark

There are no peers in the rural segment, as the benchmark itself was launched in July 2024, the Nifty Rural Index. The index picks stocks from the Nifty 500 which are allied to rural sector. The index will have a maximum of 75 stocks.

As on December 31, ITC, Bharti Airtel and SBI are the leading companies in the Rural Index accounting for 25 per cent. The index composition (see table) is led by financial services, FMCG and automobiles which together account for 63 per cent of the index weight. Compared to Nifty 50, the top five sectors includes the above three and IT and oil and gas in Nifty 50. The Nifty Rural can be interpreted as Nifty 50 sans IT, oil and gas, healthcare and metals. The index is currently trading at 27.2 times trailing earnings, which is a premium compared to Nifty 50’s 21.8 times. The index factsheet states a hypothetical performance of 17.6 per cent CAGR in last five years outperforming the Nifty 50’s 15.5 per cent CAGR in the same period.

Our View

The fund has timed its launch at an appropriate time compared to other NFOs which are launched mid-way through the cycle or well past their prime. With the upcoming budget announcement expected to favour rural economy and the anticipated turnaround in rural demand that has been reiterated by FMCG, auto and agri commodity companies make the timing aspect attractive.

The portfolio construction will be crucial to watch and there must not be too much overlap with standard large-cap indices or with any of the fund house’s existing schemes.

However, investors with an ability to digest volatility can consider parking a small sum in the NFO, given that the theme’s offering is unique.

Right timing
With the upcoming budget announcement expected to favour rural economy and anticipated turnaround in rural demand make the timing aspect attractive
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