 "Capitalise on secular spending surge with consumption-themed equity fund")
The Indian consumption story seems to be picking up steam with early signs of rural recovery. According to NielsonIQ, a consumer intelligence firm, in the January-March quarter volume growth in rural regions was higher than in urban areas for the first time in five quarters. Rural demand grew 7.6 per cent year-on-year compared to 5.7 per cent in urban areas. The Reserve Bank of India (RBI) also acknowledged this as an indicator of rural recovery in a recent report. Should investors consider consumption-themed equity funds at this juncture?
A theme for the long-term
The consumption theme does well in an expanding economy when incomes are rising and inflation is relatively low. A relatively low-interest rate regime can also provide a fillip to consumption.
Mass consumption was subdued in the past couple of years owing to Covid-related challenges and high inflation. “With initial signs of rural recovery and inflation levels being under control, consumption growth could turn more broad-based. A good monsoon would boost farm income and drive mass consumption. Interest rate reversal could be another kicker, though its timing remains uncertain,” says Abhinav Khandelwal, fund manager, equity, Mahindra Manulife Mutual Fund.
The consumption theme is structural in nature. “India’s demographics provide a great long-term opportunity for consumption to grow at a healthy pace,” says Siddhant Chhabria, research analyst and fund manager, Mirae Asset Investment Managers.
Easy availability of finance further propels consumption.
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There is growing expectation that the market may favour more defensive themes like consumption in the near future.
Diversified bets
According to Khandelwal, consumption funds have the potential to maintain a good mix of cyclical and structural stocks. Chhabria adds that consumption is a long-term investment theme with the flexibility to invest across market caps and styles.
Consumption themed funds invest across a diversified range of sectors: Fast-moving consumer goods (FMCG), auto, telecom, consumer durables, healthcare, power, organised retail, and realty. Some also include financial services firms that aid consumption.
“New opportunities are emerging within consumption. Over the past few years, we have seen many high-growth businesses being listed within apparel, quick service restaurants (QSR), footwear, cables and wires, jewellery, and new categories like e-commerce and stationery. More subsectors will emerge,” says Chhabria.
The fund play
Twenty-one consumption-themed equity schemes together managed assets worth Rs 23,342 crore on April 30, 2024, according to Value Research.
While some actively-managed schemes have a long track record, fund houses have also launched passively-managed exchange-traded funds (ETFs) mimicking the performance of the Nifty Consumption Index. And the Nifty Non-Cyclical Consumer Index.
“To play sectoral themes, we prefer established, actively-managed funds instead of passive funds. In the former, stocks are chosen carefully by a fund manager after evaluating the underlying business fundamentals, growth prospects, management strength, and valuations,” says Jiral Mehta, senior research analyst, FundsIndia.
Risks remain
Consumption funds carry the risks associated with thematic funds. “Usually, thematic and sector funds carry higher risk compared to diversified equity funds,” says Mehta.
Khandelwal adds that a tepid rural recovery, weak monsoon or sharp increase in input costs due to geopolitical factors are the key risks.
Add to satellite portfolio
Investors with high-risk tolerance may go for these funds. “Investors who have a high-risk appetite can consider consumption funds along with one or two other structural themes such as banking and financial services, manufacturing and technology as a part of their satellite portfolio,” says Mehta.
Chhabria adds that one should invest with a horizon of five-plus years.