Thematic consumption funds have forced us to rethink | Value Research These funds have been consistently good over the last seven years. But there’s a but.

Thematic consumption funds have forced us to rethink

These funds have been consistently good over the last seven years. But there's a but.

Thematic consumption funds have forced us to rethink

A thematic fund has a rather limited universe. Yet their popularity has surged in recent years. The current value of thematic funds is a little over Rs 1.2 lakh crore - nearly 8 per cent of all equity funds' investments.

Not to be confused with sectoral funds, thematic funds invest in stocks of companies that are married to a particular idea. Take ESG funds, for instance. Belonging to the thematic family, these funds exclusively invest in companies that rank high on Environmental, Social and Corporate Governance factors. Since thematic funds have a particular ideology, they have a handful of stocks to invest in.

Given their constraint, we at Value Research have always batted for a more diversified mutual fund instead. A flexi-cap fund - even a large-cap passive fund - is less risky. The reason is simple: flexi-cap fund managers have a large universe of stocks and, consequently, a bigger pool of quality stocks to choose. A case of choice beating dogma.

Flipping perception
Yet thematic consumption funds are proving otherwise. As the name suggests, these funds invest in companies that feed off India's consumption growth story.

While we look at their limitations a little later, let's first look at how these funds are faring against flexi-cap and large-cap passive funds, the larger and more flexible mutual funds.

Assuming you started investing Rs 10,000 through SIP five years back, your Rs 6 lakh worth of investment would now look like this:

In fact, thematic consumption funds have done well over the last one to seven years.

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Over the last three years, consumption funds score over flexi-caps and large-cap passive funds over a five-year rolling basis.

Key takeaways
On pure performance, consumption funds have the edge over diversified mutual funds, prompting us to rethink.

But upon re-evaluation, we still observed lingering drawbacks.

  • The concept of idea-based investing still seems restricting, as fund managers should have more stocks to choose from.
  • In addition, there are only 15 consumption funds available to you. Of which, five were rolled out in recent months. It's always best to stay away from funds less than three years old. On the other hand, you are spoilt for choice when looking to invest in a quality flexi-cap fund. You can check our Analysts' Choice's Growth section to get a list of the best flexi-cap funds in the market.
  • Consumption funds are not cost-effective either. If you exclude ETFs, many of these funds have an expense ratio above 1.2 per cent, which is a wealth-guzzler.

Our verdict
It's true consumption funds have exceeded our expectations, and India's consumption story remains upbeat. However, we'd still like to stick with relatively-safer diversified mutual fund options, such as flexi-cap funds, as they can choose from a larger pool of quality stocks. More the merrier, if it serves our purpose.

Suggested read: Factor-based mutual funds: Fit or flop?

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