Widely read:
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India's GDP per capita has grown five-fold this millennium, from a modest $442 in 2000 to $2,484 in 2023.
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The 'Affluent India', a term coined by Goldman Sachs for people earning above $10,000 (Rs 8.5 lakh) per year, is also projected to grow from 60 million to 100 million by 2027.
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And given India's mammoth 1.4 billion population, you would like to think that domestic demand has been and will remain a long-term theme.
- In fact, a study by UBS Securities has shown that India is poised to become the third-largest consumer market by 2026.
So, how can you, as an investor, ride the consumption wave?
One way to do so is through consumption funds . As the name suggests, these mutual funds invest in the consumption theme.
However, they don't solely invest in Consumer Staples or FMCG (fast-moving consumer goods) sectors. They also allocate money to the Technology, Financials, Industrials, Healthcare and Real Estate sectors, as seen in the table below.
A further glance at the table shows that Consumer Discretionary and Consumer Staples have dominated consumption funds' portfolios over the last five years, constituting more than 60 per cent of the portfolios. Technology, too, has seen a steady rise in their portfolios.
On the other hand, the weightage of Financials, Industrials, Healthcare and Real Estate has declined from 2023.
Consumption funds' sectoral composition
While Consumer Discretionary and Consumer Staples dominate their portfolios, other sectors find a place, too (In %)
| Sector | 2020 | 2021 | 2022 | 2023 | 2024 |
|---|---|---|---|---|---|
| Consumer Discretionary | 26.93 | 26.91 | 30.34 | 31.72 | 34.91 |
| Consumer Staples | 30.80 | 29.93 | 31.06 | 32.15 | 30.91 |
| Technology | 4.97 | 5.62 | 5.99 | 5.98 | 11.32 |
| Industrials | 5.07 | 5.40 | 4.73 | 6.17 | 4.77 |
| Unspecified | 1.98 | 3.96 | 4.91 | 5.40 | 4.53 |
| Financial | 12.89 | 14.95 | 12.39 | 7.37 | 4.51 |
| Materials | 13.01 | 9.03 | 5.69 | 5.97 | 3.47 |
| Healthcare | 3.78 | 2.91 | 3.74 | 3.77 | 3.32 |
| Energy & Utilities | 0.14 | 0.46 | 0.43 | 0.26 | 1.18 |
| Real Estate | 0.43 | 0.62 | 0.72 | 1.20 | 1.07 |
| Data as of October 31, 2024 | |||||
How have consumption funds fared in the past?
Although the category has given an average return of 27.5 per cent in the last 12 months, they have underperformed other equity fund categories. In fact, 13 out of 20 equity categories have outperformed consumption funds during this period.
However, when you look at their long-term performance, the picture seems brighter. Based on a five-year rolling returns basis over 10-year periods, consumption funds outpaced flexi-cap funds and the Nifty 500 TRI 90 and 72 per cent of the time, respectively.
Further, consumption funds tend to endure bearish market phases better than their flexi-cap peers and their benchmark. With nearly one-third of the allocation in Consumer Staples (which comprise essential goods and FMCG companies), which are typically more stable during crashes, consumption funds faced smaller declines than the broader market.
The table below illustrates how this category has performed relative to the benchmark and flexi-cap category during market downturns over the past 20 years.
Consumption funds are resilient
They usually fall less than flexi-cap funds during steep market corrections (In %)
| Periods with more than 20 per cent market decline | Consumption funds | Nifty 500 TRI | Flexi-cap funds |
|---|---|---|---|
| Jan-04 to May-04 | -18.8 | -27.5 | -19.0 |
| May-06 to Jun-06 | -28.3 | -31.6 | -31.1 |
| Jan-08 to Mar-09 | -54.9 | -57.8 | -54.6 |
| Nov-10 to Dec-11 | -17.7 | -28.1 | -27.1 |
| Jan-15 to Feb-16 | -14.3 | -17.1 | -17.5 |
| Jan-20 to Mar-20 | -31.8 | -37.9 | -35.6 |
Should you invest in consumption funds?
While consumption funds have shown decent performance over time, they come with certain risks.
First, the top three sectors constitute the lion's share of their portfolios (77 per cent), making them highly concentrated and, therefore, risky. Second, barring Consumer Staples, the remaining two-thirds of the money is invested in sectors that are cyclical in nature.
This is why we suggest you stick to diversified equity funds like multi-cap funds. They provide broader diversification due to exposure to more sectors.
What's more, consumption and flexi-cap funds of the same AMC usually have a 25 per cent overlap, making it better to invest in the latter.
Yet, if you are keen to invest in consumption funds, we suggest allocating only a small part of your portfolio (5-10 per cent) to it.
If you are looking for the right mutual funds to invest in, subscribe to Value Research Fund Advisor . Here, you will get access to in-depth research, tailored recommendations, and tools to build a well-diversified portfolio that aligns with your goals. Whether it's flexi-cap funds or any other investment option, our insights empower you to make informed choices.
Take control of your investments today with Value Research Fund Advisor .
Also read: Before you invest in infrastructure funds, read this!
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