China +1, the PLI scheme, and manufacturing mutual funds: what actually connects them

Two phrases get repeated constantly in any conversation about Indian manufacturing: China +1 and the PLI scheme. They are usually presented as a single story: the world is leaving China, India is catching the overflow, therefore buy manufacturing.

The reality is more specific and more interesting. China +1 is a decision being made in foreign boardrooms about supply chain risk. PLI is an Indian fiscal instrument designed to make India the place that decision lands. One is a pull, the other is a push. Where they meet is a set of listed companies that most people underestimate, because the obvious beneficiaries are not the interesting ones.

This piece walks through both, then looks at what a manufacturing mutual fund actually owns and what you are really taking a position on.

China +1: a risk decision, not an exit

China +1 is often described as companies leaving China. That is not what it means. The "+1" is the whole point. It is an additional location, not a replacement one.

The logic is straightforward once you look at it from a manufacturer's side. If every component of your product comes from factories inside one country, then that country's port closures, export controls, energy rationing, tariff regime, or diplomatic relationships are all single points of failure in your business. COVID demonstrated this in the most expensive way possible: firms with perfectly healthy demand could not ship product, because one link in a chain they did not control had stopped.

Geopolitics then made a temporary lesson permanent. Tariffs, export restrictions on critical inputs, and general strategic tension converted "supply chain resilience" from a slide in a risk presentation into a capital allocation decision. The response is diversification: keep China, which still has manufacturing scale and depth no one else can match, and build a second base elsewhere. India, Vietnam, Mexico, Thailand, and Indonesia are the usual candidates.

That framing matters for investors. China +1 is not a race India wins outright. It is a multi-decade reallocation in which India competes for share against several credible alternatives, each with different strengths: Vietnam on electronics assembly speed, Mexico on proximity to the US market, India on domestic market size and engineering depth.

Where India stands

A few reference points, all of which should be treated as directional rather than precise:

The FDI number deserves a caveat that rarely gets made. The headline figure is gross inflow. Net FDI, after repatriation and outward investment by Indian entities, has been substantially lower in recent years. Both numbers are true; they answer different questions. Gross tells you about activity and interest, net tells you about durable capital retained. Anyone quoting only the large number is telling you half of it.

On electronics specifically, the shift is real and visible. Contract manufacturers including Foxconn, Tata Electronics, and Pegatron have materially expanded Indian operations, and India's share of global iPhone assembly has risen sharply from a near-zero base over several years. The direction is not in dispute. The exact share moves quarter to quarter and varies by source, so treat any single percentage you see with caution.

PLI: paying for output, not for showing up

The Production Linked Incentive scheme is India's attempt to convert global interest into actual factories. Its design is what makes it different from decades of previous industrial policy.

Older incentive regimes largely subsidised inputs: cheap land, tax holidays, capital subsidies. You got the benefit for building the plant. Whether the plant ever produced anything competitive was a separate matter, and often it did not.

PLI inverts this. The incentive is paid as a percentage of incremental sales of eligible goods manufactured in India, over a base year, subject to meeting minimum investment thresholds. In plain terms: invest the committed amount, then actually produce and sell more, and the government pays out on the increase. Produce nothing, receive nothing.

That structure does two useful things. It ties public money to measurable output rather than to announcements, and it self-selects for firms that believe they can compete, because the payoff only arrives if they do.

The scheme spans 14 sectors with a combined outlay of roughly ₹1.97 lakh crore, including:

• Large-scale electronics manufacturing and IT hardware
• Automobiles and auto components
• Pharmaceuticals and bulk drugs
• Solar PV modules
• Telecom and networking products
• Advanced chemistry cell (ACC) batteries
• Food processing
• Textiles
• White goods, specialty steel, drones, and medical devices

Performance across those 14 has been uneven. Electronics and pharma have absorbed incentives and delivered output far more effectively than several others, where disbursement has lagged targets significantly. A scheme-level average hides that spread. If you are assessing the theme seriously, the sector-wise disbursement data is the number that matters, not the headline outlay.

The second-order beneficiaries

Here is where most retail thinking stops short. The instinct is to buy the company whose name is on the product: the auto maker, the phone brand, the appliance manufacturer.

But a factory is not built out of ambition. Before a single unit ships, someone has to supply the switchgear, the motors, the industrial automation, the process heating, the transformers, the electronics, the power connection, and the logistics that move everything in and out. Those suppliers get paid during the capex phase, regardless of whether the final product eventually succeeds in the market.

This is the picks-and-shovels layer of the manufacturing story, and it spans:

• Electrical and automation equipment. The switchgear, drives, and control systems every plant needs. Firms like Siemens India and ABB India operate here.
• Industrial process equipment. Boilers, heating, cooling, and water treatment. Thermax is a well-known listed example.
• Power generation and distribution. New industrial load has to come from somewhere, which pulls in generation and transmission players such as Tata Power.
• Engines and industrial power systems. Cummins India sits in this category.
• Electronics and defence systems. Bharat Electronics, with meaningful exposure to domestic manufacturing and indigenisation programmes.
• Solar and renewable equipment. Waaree Energies among the module manufacturers benefiting directly from solar PV incentives.

These are illustrations of a supply chain, not recommendations. The analytical point is structural: capital goods and industrial infrastructure companies are levered to the rate of factory construction across the whole economy, not to the fortunes of any one end product. That is a broader and, arguably, a more durable exposure, though it is also a more cyclical one, because capex cycles turn.

What a manufacturing mutual fund actually is

A manufacturing fund is a thematic equity mutual fund. It invests predominantly in companies across the manufacturing value chain: industrials, capital goods, autos and auto components, electronics, chemicals, pharma, metals, defence, and often power and infrastructure adjacent to them.

The case for it over single-stock selection is genuine. Picking which specific firm wins a decade-long industrial shift is extremely hard. Getting the theme right and the company wrong is a common and expensive outcome. A thematic fund spreads exposure across many names in the ecosystem, so the fund can work even when individual constituents do not.

The category, as it actually stands

Here is the manufacturing thematic category, sorted by fund size. Figures are approximate and reflect data as of 31 July 2026, for regular plans.

Four things in that table are worth more than the return column.

Most of these funds are too new to judge. Count the "n/a" entries in the 3Y column. The large majority of this category has no three-year record at all, because the funds were launched into the theme's popularity rather than before it. The three schemes with a five-year history are the only ones that have been tested across anything resembling a full cycle, and they are not the biggest ones.

Fund size and track record are inversely related here. HDFC Manufacturing Fund is the largest in the category at roughly ₹10,328 crore, and has no three-year number. Bank of India's scheme has the strongest long record in the table and holds under ₹800 crore. Assets followed the marketing, not the evidence.

The cost spread is enormous. Active schemes run from about 1.55% to 2.92%, while the index funds and the ETF fund-of-fund sit between 0.69% and 0.90%. On a decade-long thematic hold, a 2 percentage point annual difference compounds into a very large number. The one clear anomaly is the UTI index fund at 2.01%, which is an index product priced like an active one; if you are buying passive exposure, that is the sort of thing worth catching.

The one-year spread is the cycle talking. Within a single theme, over a single year, the range runs from about 3.7% to 21.8%. These funds all claim the same story. The dispersion comes from portfolio construction, market-cap mix, and how much power, defence, or auto weight each carries. The theme did not deliver those returns; the manager's specific choices did.

But three properties of this category need stating plainly, because the marketing rarely does.

It is not diversified in the way a diversified fund is. A manufacturing fund is concentrated in a correlated set of sectors that broadly move together with the industrial capex cycle. When that cycle turns, there is nowhere inside the portfolio to hide. It is a sector bet wearing a diversification label.

It is cyclical, and cycles are long. Industrial capex does not move in neat annual steps. It runs in multi-year waves driven by capacity utilisation, interest rates, and policy. Buying near a peak in enthusiasm and holding through a downturn is entirely possible, and the downturn can last years.

Recent returns are a poor guide. Manufacturing and capital goods have had a strong run in India, which is exactly why these funds are being marketed now. Strong trailing returns in a cyclical theme are as much a warning about entry valuation as they are evidence of quality. Note also what the table shows: the healthy-looking 3Y and 5Y numbers around 19% to 22% belong to a handful of older schemes, while most one-year returns sit far below that. The category's own data is already showing the gap between the launch-era numbers and what the theme is currently delivering. Check where sector valuations sit relative to their own history before deciding that past performance is the thesis.

What to actually check

Not a recommendation, just a checklist for anyone evaluating the theme.

1. Read the holdings, not the pitch. Open the latest factsheet. Is this genuinely a manufacturing ecosystem portfolio, or a large-cap fund with an industrial tilt and a thematic expense ratio?
2. Check the market-cap mix. Many manufacturing funds carry heavy mid- and small-cap weight. That amplifies both directions and is the single biggest driver of how the fund will behave in a drawdown.
3. Look at sector-wise PLI disbursement, not the outlay. Announced allocation is a budget line. Disbursed incentive is evidence something was produced.
4. Separate structural from cyclical. Localisation of component ecosystems is structural. A capex upcycle is not. Know which one you are underwriting.
5. Compare against a flexicap. Over the same period. If a diversified fund delivered something similar with less concentration risk, the theme premium bought you very little.
6. Size it as a satellite. This is a decade-horizon thematic position, not a core holding. It needs to be small enough that a three-year flat stretch does not force you to sell.
7. Have an exit view before entry. Thematic funds are easy to buy at the top of enthusiasm and very hard to exit at the bottom of it. Decide in advance what would tell you the thesis broke.

What could go wrong

Balance requires naming the risks, and they are not trivial.

Execution and infrastructure. Land acquisition, labour regulation, logistics costs, and power reliability remain genuine constraints. Competing destinations have spent years optimising exactly these frictions.

Competition for the same slot. Vietnam, Mexico, Thailand, and Indonesia are pursuing the identical opportunity with their own incentives. India winning the announcement is not India winning the volume.

Component depth. Assembling in India while importing every high-value component captures relatively little of the margin. The transition to genuine component manufacturing is harder, slower, and more capital-intensive than assembly.

Policy dependence. PLI incentives are time-bound. A business model that only works with the subsidy is not a business model. The test arrives when the incentive window closes.

Global demand. Every one of these factories assumes someone buys the output. A global slowdown hits manufacturing capex faster and harder than most sectors.

The bottom line

China +1 is a real and durable shift in how global supply chains are structured, driven by risk management rather than sentiment, which is why it is unlikely to reverse quickly. PLI is a genuinely better-designed piece of industrial policy than what came before it, because it pays for output rather than intent. Both of those statements can be true while the investment case still requires care.

The most underappreciated part is the second-order layer: the capital goods, automation, power, and industrial infrastructure companies that get paid to build the factories, no matter which end product eventually wins. That exposure is broader than the headline manufacturing names, and it is what a well-constructed manufacturing fund should be capturing.

What such a fund gives you is diversified access to a long, cyclical, policy-supported industrial transition. What it does not give you is safety. It is a concentrated bet on one part of the Indian economy, bought after a strong run, in a category where the cycle matters as much as the story. Held as a small satellite position over a decade, that is a coherent thesis. Held as a core allocation bought on trailing returns, it is a cycle risk wearing a growth narrative.

Want a compliance-first framework for where a thematic allocation fits alongside the rest of a portfolio? That is what the Mintants advisory platform is built to support. You can also start a conversation with us.

Educational analysis only, not investment advice or a recommendation. Company names are illustrative of a supply chain and are not picks. FDI figures, PLI allocations, market shares, and fund holdings are indicative, vary by source, and change frequently, so verify against the latest official disclosures and scheme documents. Consult a SEBI-registered investment adviser before making financial decisions.