How you should bet on FMCG funds to tap into the last defensive sector

Stellar past returns of FMCG sector funds make them an attractive bet. But your investment in these funds should be limited and the time horizon should be long

If you look at the trailing returns of sector funds belonging to the fast-moving consumer goods (FMCG) sector, they are remarkably attractive (see table). Turn to the year-wise performance and they are equally eye-catching: These funds have given positive returns every year except 2008. With the information technology and pharma sectors faltering in recent times, FMCG remains the last defensive in which investors can seek refuge when the markets turn turbulent. 

Several factors are responsible for the stellar performance of FMCG funds. "Consistent earnings growth relative to the broader market has been the biggest driver for the FMCG sector so far. Rural growth and penetration, distribution expansion, raw material tailwinds, cost efficiency initiatives undertaken by most of the companies, and more recently, GST-led benefits have aided the sector's earnings, which have witnessed around 15 per cent growth," says Atul Patel, fund manager, ICICI Prudential FMCG Fund. He further adds that the TINA (there is no alternative) factor has also helped the sector because cyclical sectors have not witnessed an earnings recovery. 

Within the FMCG space, some segments have fared better than others. Companies in the packaged food and beverage industry and discretionary spaces have considerable headroom for growth, given their low penetration, per-capita consumption and increasing rural aspirations. Patel says that companies in this space have performed better than the ones in home and personal care space, since penetration levels are already high in the latter. 

The key to the stellar performance of this sector is its resilience even during economic and market downturns. FMCG companies are generally stable and have consistent cash flows, and their balance sheets tend to be debt-free. They also tend to have higher free cash flow and return on equity than highly leveraged cyclical companies. Their lower earnings volatility makes the sector a good defensive play in bear markets. 

The bulk of your investments should be in diversified equity funds. Sector funds should only be used as a topping with at best a five per cent allocation to a particular sector fund. Only those investors who have a view on the sector should invest in these funds. Investing in these also requires a higher risk appetite and an investment horizon of at least seven years to avoid making losses.