Consumption funds: Strong returns await investors who can endure slowdowns

While consumption funds turned in a decent performance over the past year, they lagged behind categories like public sector unit (PSU), pharma, infrastructure and technology. But fund managers remain positive about their long-term prospects. Fund houses have launched six new schemes around this theme in the past year. The latest entrant is the new fund offer of the Bank of India Consumption Fund.

 

“Consumption is the bedrock of the Indian economy. Approximately two-thirds of India’s GDP comes from consumption. If the Indian economy is to do well, then consumption must do well,” says Ajay Tyagi, head of equity and fund manager, UTI Asset Management Company (AMC).

 

As of October 31, 2024, 25 consumption-based schemes managed assets worth Rs 35,231 crore. These schemes include actively and passively managed funds. Passively managed funds track indices such as the Nifty Consumption Total Return Index (TRI) and the Nifty Non-Cyclical Consumption TRI. 

 

 

A diverse and promising theme 

 

The consumption theme is among the most diverse, spanning sectors like fast-moving consumer goods (FMCG), consumer discretionary, jewellery, apparel, housing, travel, and quick-service restaurants (QSR). These sectors in turn have many sub-segments based on product offerings and addressable market size.

 

“Consumption is a secular growth theme in India. As the country moves up from a per capita income of $3,000 to $5,000 to $10,000, Indian consumption will grow manifold. The attractiveness of investment in the consumption space is the consistent return over time,” says Shiv Chanani, senior manager equity, Baroda BNP Paribas Mutual Fund.

 

Over the past 10 years, consumption funds have delivered a compound annual growth rate (CAGR) of 14.6 per cent. “Over a long horizon, the returns from consumption funds should beat broader indices,” says Sonam Udasi, senior fund manager, Tata AMC. He adds that among sectoral funds, consumption is the least risky.

 

Over the past year, consumption funds yielded returns of 28.6 per cent, lower than PSU (46.4 per cent), pharma (42 per cent), infrastructure (39.1 per cent), and technology (37.8 per cent). “Inflation, particularly food inflation, has been high in the past few quarters, reducing consumer surplus --a critical driver for consumption,” says Tyagi. 

 

Rural demand leading recovery 

 

According to Nielsen IQ, in the third quarter of 2024, urban consumption grew by 2.8 per cent whereas rural consumption increased by 6 per cent, up from 5.2 per cent in the previous quarter.

 

“While rural consumption is reviving, there seems to be some softness in urban consumption. Rural consumption was lagging for the past 12-18 months. However, good monsoons and a healthy increase in minimum support price (MSP) have led to an uptick in rural income, which in turn is reflected in demand recovery. Urban consumption, on the other hand, has witnessed softness primarily on account of a crackdown on retail lending,” says Chanani.

 

Over the next year, rural consumption is expected to outperform urban consumption due to government initiatives and a good harvest. “Over a 5-7-year horizon, both urban and rural consumption should grow equally as aspirations of the young in both areas rise,” says Udasi. 

 

A long-term investment 

 

The consumption theme holds promise for long-term growth, but investors must be prepared for phases of slow growth. Udasi recommends a minimum investment horizon of 3-5 years, while Tyagi suggests a longer holding period of 5-7 years. The latter also advises limiting exposure to sectoral and thematic funds to 10-15 per cent of the equity portfolio.