In order to offer retail investors a chance to invest in India’s consumption potential, asset management companies are launching consumption funds. These open-ended funds aim to generate long-term capital growth from an actively managed equity portfolio of companies which will benefit from consumption and consumption-related activities.
While HSBC Mutual Fund had launched such a fund in August, Kotak Mutual Fund has launched Kotak Consumption Fund which aims to offer long-term capital growth by investing in firms in sectors such as fast moving consumer goods, financial services, automobiles, consumer durables, etc. Subscription to Kotak AMC’s new fund offer will close on November 8.
The last two years have seen the consumption sector lagging significantly. But now with elections in five states next month and general elections next year, experts say there will be substantial public spending which will boost consumption. In fact, growth stocks are primarily the driving force behind this sector. So, is it a right time to invest in consumption funds, which are thematic funds and can be very volatile in the short run?
Rising income leads to premiumisation
Consumption is generally an evergreen theme and India has always been regarded as a strong domestic consumption market. Also, the move from unorganised to organised and premiumisation are some investment themes on which investors have relied on. The launch of consumption funds underscores the fund houses’ bullish outlook on the consumption sector driven by the belief in India’s robust consumption story. Sonam Srivastava, founder and fund manager, Wright Research, a portfolio management service, says, “Investors’ appetite for consumption funds is high because they see them as a gateway to tap into this evolving story, anticipating attractive returns from companies that cater directly to end consumers.”
Alekh Yadav, head, Investment Products, Sanctum Wealth, says where a lot of the concerns are emanating from global markets, India is relatively better placed creating a case for focusing domestically. “This is likely the reason for new fund offers (NFOs) in the consumption space,” he says. However, he says investors have enough investment avenues to capture the consumption story and may not necessarily need allocation into these NFOs. “Most multi-cap/flexi-cap funds are anyway skewed towards domestic markets at this moment,” he says.
Lofty valuations
Given the lofty valuations in the consumption sector, fund managers often face the challenge of generating alpha. While the Nifty India Consumption Index’s one-year forward price-to-earnings is trailing close to its five-year average, certain segments of the market, especially mid-caps and small-caps have valuations exceeding their long-term averages. This is where the stock selection and allocation strategies help fund managers deliver alpha.
Nirav Karkera, head, Research, Fisdom, says most fund managers seek to identify high-growth stocks in pockets that stand in the first order of benefitting during a sectoral uptick. “While it is important to be valuation-conscious, valuations are often viewed in the context of anticipated growth. A combination of effectively capturing the upside and efficiently mitigating downside results in sustained alpha creation,” he says.
Similarly, Mukesh Kochar, national head, Wealth, AUM Capital, says good prospects are available at an appropriate valuation in a certain number of areas. “This sector can do well once the growth cycle begins to be driven by increased spending. However, because of the visible demand cycle, stocks are rarely made available at very low prices for consumption-oriented companies.”
Hold for long
Consumption funds, like other equity-oriented funds, give higher returns over a long period as this allows investors to ride out market volatilities and benefit from the compounding effect. A longer holding period can help investors fully capitalise on the growth potential of the consumption sector, navigate the economic cycle and mitigate short-term market fluctuations.
Santosh Joseph, founder and managing partner, Refolio Investments and Germinate, says investors should hold consumption funds for at least five years knowing it is a concentrated bet. “In an event where you invested and made money quickly, you should not be greedy and wait too long to make an even higher return because returns are very lumpy in such funds,” he says.
Factors to consider
Before investing in consumption funds, individuals should assess their risk appetite, as these funds are sector-specific and can be volatile. “It’s crucial to understand the fund’s investment philosophy and the sectors it targets. Being aware of the expense ratio and other charges associated with the fund is vital to ensure that costs don’t eat into the returns,” says Srivastava.