What are consumption funds and who should invest in them?

Consumption funds are thematic mutual funds that invest in companies producing the goods and services we use on a regular basis. With India projected to become one of the world’s largest consumer markets by 2030, spurred by economic expansion and an increasing middle-class population, consumption funds offer investors the opportunity to tap into the growth potential of this space. This article will help you understand consumption funds, their benefits and risks, and the factors you should consider while investing in them.

• Table of contents

1. What are consumption funds?
2. What are the benefits of investing in consumption funds?
3. Risks associated with thematic funds
4. Who should invest in consumption funds?
5. How to invest in consumption funds?
6. Factors to consider before investing

What are consumption funds?

Thematic mutual funds are equity-based investment vehicles focused on a particular theme or overarching concept. They invest in companies across various sectors unified by a common concept. For example, an infrastructure-themed fund might encompass investments in cement, power, and steel, among other relevant industries.

Consumption funds, a specific category within thematic funds, invest in the equities of companies operating within consumption-driven themes. These are businesses involved in the production of goods and services. This diverse category includes fast-moving consumer goods (FMCG), automobiles, electronics, consumer durables, fashion, tourism, telecommunications and much more. In a growing economy, when incomes rise, the demand for goods and services grows, which translates to growth potential for investments in companies that benefit from this trend. If the value of the underlying company stocks in a portfolio rise, the fund sees growth, reflected in its Net Asset Value or NAV.

Due to their thematic nature, consumption funds that are adequately diversified can bridge the gap between cyclical and defensive sectors, as some consumer goods are discretionary items, while others, such as groceries, clothing, healthcare, and utilities are essentials.

What are the benefits of investing in consumption funds?

Here are some reasons why consumption funds can be an attractive investment opportunity:

• Growth potential: While consumption patterns may rise or fall based on economic conditions, consumption-related sectors tend to stay relevant. A well-managed fund can therefore identify and tap into industries that offer long-term growth potential.
• Market leaders: Consumption funds can include leading companies driving India's consumption boom, providing access to some of the biggest players in the sector.
• Leveraging India's growth story: By focusing on consumer-oriented sectors, these funds align your investments with the expanding Indian consumer market, enabling you to potentially capitalise on the nation's economic upswing.
• Vast investment universe: The consumption segment is broad and constantly evolving, resulting in diverse and dynamic investment opportunities, including both defensive and cyclical sectors.
• Professional management: Thematic funds are actively managed by financial experts. This can make investing easier and less risky compared to investing in individual stocks, as fund managers conduct thorough research to identify growth opportunities. Moreover, they can adapt the portfolio to changing trends within the theme. Additionally, you can invest in multiple consumption-related sectors and businesses through a single investment.

Risks associated with thematic funds

Despite these benefits, thematic funds can entail higher risk than equity fund categories that invest across the market. These include:

• Concentration risk: The focus on consumer-related sectors can heighten the impact of adverse events or downturns within those specific industries, potentially leading to increased volatility and greater risk if these sectors underperform the broader market.
• Market sensitivity: While offering the potential for higher returns, thematic consumption funds are inherently linked to the overall market's performance. During periods of economic contraction or market corrections, these funds may experience significant value declines when consumer spending falls during economic slowdowns.

Who should invest in consumption funds?

Given their risk profile, consumption funds are suitable for investors seeking higher long-term growth potential than the broad market but are willing to take on greater risk. They can generate superior returns during periods characterised by robust consumer spending and economic growth but can witness steep declines in slow or falling economic conditions, especially in discretionary sectors such as fashion, tourism, luxury, electronics, automobiles etc.
To mitigate these risks to some extent, you can choose to invest in SIP (Systematic Investment Plan), which allows you to invest a fixed amount at regular intervals. By investing across market cycles, you mitigate the risk of timing the market and can leverage both market ups and downs.

How to invest in consumption funds?

You can invest in consumption funds online as well as offline through several routes:

• Asset Management Companies (AMCs): You can directly invest in these funds by visiting the website or office of the respective AMC that offers the desired consumption-themed fund.
• Online investment platforms: Numerous online platforms facilitate investments in mutual funds.
• Financial advisors or distributors: If you prefer personalised guidance, you can seek the assistance of a financial advisor or distributor who can recommend suitable consumption-themed funds.

Factors to consider before investing in consumption funds

Here are some things to bear in mind before investing in consumption funds:

• Risk tolerance: Investors seeking reduced investment risk may find the concentrated nature of these funds unappealing. Broad-based equity funds may be more suitable for such investors.
• Long-term investment horizon: To effectively navigate the inherent risks and optimise potential gains, a long-term investment horizon is recommended. This also aligns with the projected long-term growth trajectory of the consumption sector.
• Portfolio diversification: It is important to acknowledge that thematic consumption funds, by design, do not offer the same level of diversification as broader market funds. Their focus remains on a specific sector, potentially limiting exposure to other market segments. Therefore, it may be beneficial to also invest in other equity funds as well as the more relatively stable debt funds.
• Scheme’s investment approach: Because of the concentrated nature of the scheme category, stock selection is key to a fund’s performance. Look at the investment philosophy and strategy of the fund you’re considering. Choose a scheme whose investment strategy aligns with your goals and investment approach.

Conclusion

Thematic consumption funds provide a unique opportunity to participate in India’s growth story. While carrying a higher risk profile due to their concentrated nature, consumption funds present the potential for market-beating returns in the long term, particularly during periods of robust consumer spending and economic expansion.

Before investing in any thematic-consumption fund, it is crucial to conduct thorough research, understand the fund's objectives and risk profile, and ensure alignment with your financial goals and risk tolerance. Consider the fund's investment objectives, strategy and the fund manager's track record.

FAQs

How long should I stay invested in consumption mutual funds?

Consumption mutual funds primarily invest in equities, which are prone to volatility and can witness significant dips during bear markets. Therefore, a long investment horizon of five-seven years or more is recommended, to potentially tide over short-term fluctuations and leverage multiple market cycles.

Where do thematic mutual funds invest?

Thematic funds must allocate a minimum of 80% of their portfolio to stocks directly linked to their chosen theme. For instance, consumption funds will invest in sectors that directly benefit from consumer spending and lifestyle trends. These could include retail, fast-moving consumer goods, luxury entertainment, electronics, tourism, etc.

Are consumption funds high-risk?

Consumption funds are typically classified as very high risk. Some contributing risk factors include:

1. Economic sensitivity: Consumption funds are sensitive to economic cycles. During economic downturns, consumer spending typically declines, which can negatively impact the performance of sectors like retail and consumer discretionary.
2. Sector-specific risks: The fund's performance is closely tied to the health of specific sectors, such as retail or consumer staples. Adverse developments in these sectors, such as changes in consumer preferences or regulatory issues, can affect the fund's returns.
3. Market volatility: Sectors within consumption funds can be volatile, particularly those related to consumer discretionary spending. Fluctuations in consumer confidence and spending patterns can lead to significant price swings.

What is meant by consumption fund?

A consumption fund is a type of thematic mutual fund that invests in companies producing goods and services consumed regularly, such as FMCG, automobiles, telecom, and healthcare. These funds aim to capitalise on India's growing consumer market driven by rising incomes and urbanization.

Is it good to invest in a consumption fund?

Investing in consumption funds can be beneficial due to their alignment with India's economic growth and consumer trends. They offer exposure to leading companies in consumption sectors with long-term growth potential. However, consumption funds also carry relatively higher risks due to sector concentration and market sensitivity.

What kind of returns can I earn from thematic-consumption?

Thematic-consumption funds have the potential to deliver reasonable returns over the long term, as they benefit from India's growing consumer demand and economic expansion. However, the return potential can vary based on market conditions and the performance of the consumption sector.

Should I invest in thematic-consumption mutual funds?

You should consider investing if you have a high-risk tolerance and a long-term horizon (5+ years). These funds align with India's consumption growth story but come with risks like sector-specific volatility and thematic reversals. Diversification within your portfolio is crucial to mitigate risks

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.