Individuals can consider investing in consumption funds now as a likely cut in Goods and Services Tax (GST) rates, coupled with monetary policy easing and reduction in personal income tax rates, will boost spending. These open-ended funds invest in firms which benefit from consumption-related activities.
Companies in sectors like fast moving consumer goods, durables, automobiles will benefit from increased consumption and higher earnings. An individual can position his portfolio to potentially benefit from the anticipated rise in consumption-based companies’ earnings, which often occurs when such positive regulatory changes are implemented.
Over a three- to five-year period, consumption funds have compounded at 16–22% annually, meaningfully ahead of broad diversified categories. This demonstrates the power of structural consumption drivers even if near-term performance is volatile. “This is a strategic move to capitalise on the early stages of this growth cycle,” says Soumya Sarkar, co-founder, Wealth Redefine, an AMFI registered mutual fund distributor.
Satellite allocation
An aggressive investor can allocate 5-10% of his overall portfolio to such funds. Given their sectoral concentration, consumption-thematic funds should be treated as satellite allocations rather than core holdings. These funds can also get skewed towards a handful of industries such as fast-moving consumer goods or automobiles. So, investors must ensure that the fund they invest in is reasonably diversified within the theme.
A minimum holding period of five years will allow cyclical trends to play out and to benefit from compounding of structural growth in consumption. This will also ensure that the investor benefits from the sector’s potential without overexposure to unique risks or short-term market fluctuations.
A longer holding period is necessary to ride out sector-specific economic cycles, like periods of low rural demand, and to capture the structural growth story of Indian consumption. “Consumption is not a quarterly or yearly story—it plays out over economic cycles, income growth trends, and policy shifts,” says Nirav Karkera, head, Research, Fisdom.
Sensitive to demand cycles
Investors must keep in mind that consumption funds are highly sensitive to demand cycles, inflation, policy moves, and valuations. It is also vital to distinguish between staples and discretionary consumption as the two move differently across economic cycles.
Swapnil Aggarwal, director, VSRK Capital, says investors should treat this theme as a complement, not a replacement, for diversified equity exposure. “The India consumption story is compelling, but it requires selectivity, valuation discipline, and a long enough horizon to let the trend play out,” he says.
More volatile
Thematic funds are inherently more volatile due to their concentration in a few sectors. Investors should evaluate whether valuations in consumer stocks have already run up, as entry timing can matter significantly. Given the lofty valuations in the consumption sector, fund managers often face the challenge of generating alpha. This is where the stock selection and allocation strategies help fund managers deliver alpha.
“Investors should pick funds from houses with a strong track record in managing sectoral bets and be prepared for periods of under-performance when the theme falls out of favour,” says Sonam Srivastava, founder, Wright Research PMS.
They must develop a clear exit strategy and stay informed about thematic trends within the sector. The investment should align with their financial goals and risk tolerance and the fund must complement the portfolio’s diversification strategy. So, if an investor is chasing quick gains, then investing in consumption funds is not the right strategy. But for long-term believers in the India growth story, consumption themes can be a powerful wealth-creation lever.