September 30, 2024
4 mins read
Thematic funds are becoming more and more popular in India, and consumption funds are one of the most popular types of thematic funds. These funds put money into businesses that make things and provide services that people use every day. Think about food, drinks, clothes, cars, phone services, and even household goods. All of these are the main things that fuel consumption-based enterprises.
In simple words, consumption funds are mutual funds that put money into companies that sell things to people. These funds are a great way for investors to take advantage of India's changing demand patterns because the country has a growing population, rising disposable income, and changing consumption habits.
A consumption fund is a form of themed mutual fund that invests in firms that sell directly to customers. Every industry has some effect on the economy, although not all of them provide goods or services directly to people.
For instance:
Steel, aluminium, and zinc are made in the metals sector. People don't buy these directly; instead, manufacturers buy them to make finished things.
But FMCG businesses like Hindustan Unilever or ITC sell packaged goods, soaps, and cookies directly to homes.
These kinds of enterprises are considered consumption funds because they deal directly with customers.
Some companies that are in these funds are:
Unilever in India
Nestle in India
ITC
Suzuki Maruti
Tata Motors
Bharti Airtel
SBI and HDFC Bank
Whirlpool in India
These businesses come from different industries, but they all have one thing in common: their goods and services affect people's lives every day.
Thematic equity funds that focus on companies that profit from increased consumer demand are called consumption funds. The portfolio is made up of sectors that focus on consumption, like FMCG, cars, telecom, and retail.
The way these funds do depends on how much people spend. For example, when people have more money to spend, they buy more cars, smartphones, packaged foods, and banking services. This demand immediately increases the profits of companies that are in consumer mutual funds.
But these funds are more volatile than diversified stock funds because they are focused on certain areas. The consumption theme's demand cycle is what makes them successful. That's why experts say these funds are better for experienced investors who can tolerate risks in different sectors.
Even though they can be unstable, consumption funds have a lot of benefits:
Potential for growth: Businesses that are driven by consumers frequently expand quickly since there is always demand for their products. There is still a lot of room for growth in this sector as India's GDP and per capita income rise.
Long-lasting: Many companies that focus on consumption have been established for decades and have weathered changes in the market. They are good investments because their business models are strong.
Attractive returns: Companies like ITC, HDFC Bank, and Hindustan Unilever have given investors compounded annual returns of more than 15% over the long run. Investors can take advantage of this kind of success by putting money into consumption funds.
The main premise is the same for all consumption funds: they invest in firms that sell things to people. However, there are several types of consumption funds based on the sector they focus on.
1. Funds that focus on FMCG
Put money into companies that make things like packaged foods, drinks, toiletries, and household goods that people buy quickly.
Some examples are ITC, Hindustan Unilever, and Nestle India.
Best for conservative investors who want regular returns.
2. Car and related funds
Give money to firms that make cars, bikes, and commercial vehicles, as well as those that make spare parts.
Maruti Suzuki, Tata Motors, and Hero MotoCorp are other examples.
More unstable, yet they grow quickly when demand is high.
3. Funds for technology and telecommunications
Pay attention to businesses that offer digital and telecom services.
Some examples are Bharti Airtel and Reliance Jio (through its parent company, Reliance Industries).
Good, since more people are using the internet and smartphones.
4. Funds for banking and financial services
Put money into banks and NBFCs that give out loans and other financial services so that people can spend money.
HDFC Bank, SBI, and ICICI Bank are a few examples.
Make sure that consumption funds are stable and expand steadily.
5. Funds for different types of consumption
Put money into a lot of different areas that have to do with consuming.
These funds are better at balancing risks and are good for moderate investors.
You can pick the ideal consumer mutual fund that fits your investing goals by knowing these groups.
Think about these things before you add consumer funds to your portfolio:
Risk profile: These funds have a high risk of concentration. The portfolio might be very volatile because it only invests in a few areas.
Long-term commitment: Investors should stay involved for at least five years to lower their risk.
Limited diversification: Even if they invest in different companies, they all work in sectors that are driven by consumption. This makes it less safe from downturns in specific sectors.
Here are some easy steps to help you choose the proper mutual fund for your needs:
Look at how the fund has done in the past 5 to 10 years.
Look at the expense ratios of different consumption funds.
Look at the fund manager's past work and experience.
Pick funds that invest in a variety of areas that are focused on consumption.
Make sure the fund fits with your financial goals, whether they are to make money in the long run or to play a theme in the near term.
Like any other type of stock investment, consumption funds come with risks. Some important dangers are:
Market volatility: Because these funds are based on themes, a drop in consumer demand can have a big effect on returns.
Concentration risk: Putting a lot of money into one subject makes the portfolio more likely to lose money when that sector goes down.
Timing of entry and exit: It might be hard to know when to invest or redeem, which makes them less suitable for beginners.
Changes in regulations: Changes in policies in the FMCG, automotive, or telecom sectors can have a direct impact on performance.
In short, the meaning of consumption funds is to invest in firms that make items and services that people use every day, such food and drinks, cars, and banking. Investors can take advantage of India's expanding demand patterns by putting money into these businesses.
But because consumption funds are only for certain sectors, they also come with hazards. They are preferable for investors who have been around for a while and can tolerate market swings and stay involved for a long time. Beginners might want to start with diversified stock mutual funds before moving on to this type of investment.
If you choose the right ones, consumption mutual funds can be a great way to ride the wave of India's booming consumption narrative.
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Companies that manufacture or provide products/services bought directly by consumers — e.g., FMCG companies like Hindustan Unilever, auto companies like Maruti Suzuki, telecom firms like Bharti Airtel.
Since consumption funds hold potential for growth, offer longevity and higher returns, they can make for great investment options for seasoned traders.
Not necessarily. Since consumption funds carry higher thematic/sector risk and require more active assessment of consumer trends, they are generally more appropriate for seasoned investors rather than beginners.
They can serve as a “growth” component in a portfolio, leveraging long-term consumer demand themes. But they should typically be complemented by other funds/sectors to balance risk, and assumed with awareness of their thematic nature.
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