Consumption funds: Rising volumes, margins may lift thematic offerings

But geopolitical risks could weigh on overall equity markets, including consumption segment

With a reduction in goods and services tax (GST) slabs from four to two, and many goods being shifted to lower brackets, consumption is expected to get a boost. Consumption funds, which invest in fast-moving consumer goods (FMCG), consumer durables, auto, retail, and hotels, have delivered flat returns (-1.4 per cent) over the past year. The rate cuts, along with other factors, are expected to bring about a turnaround in the performance of these funds.

 

Impact of rate cuts

 

Discretionary categories like auto, consumer durables, footwear, and apparel stand to gain. “These are segments where consumers typically defer purchases in a high-cost environment, so a price reduction can trigger elasticity and accelerate volume recovery,” says Siddhant Chhabria, research analyst and fund manager, Mirae Asset Investment Managers (India).

 

The cuts are likely to accelerate a shift from the unorganised sector to organised. “Consumption funds are likely to benefit on account of better volume-led growth for companies benefitting from the rate cut, and also due to possibly higher discretionary spends on account of higher disposable incomes,” says Priyanka Khandelwal, fund manager, ICICI Prudential Mutual Fund.

 

Higher disposable incomes of about Rs 1 trillion from income-tax reductions, a one-percentage-point rate cut by the Reserve Bank of India (RBI), and the expected 8th Pay Commission payout are other factors expected to support consumption.

 

Current headwinds

 

The sector has faced multiple challenges in recent years. “High inflation eroded affordability, delayed discretionary demand, and squeezed margins due to weak operating leverage. These pressures weighed on earnings and, consequently, stock performance,” says Chhabria.

 

While earning growth has been sluggish, valuations of several consumption stocks already factor in an earning growth revival. “The mismatch between expectation and reality has resulted in weaker stock price performance,” says Khandelwal.

 

Geopolitical risks, however, could weigh on overall equity markets, including consumption stocks.

 

Fund managers are of the view that with volumes picking up and margins likely to expand as operating leverage improves, the medium- to long-term outlook for consumption is constructive.

 

Who should invest?

 

Consumption funds work best for long-term investors with a horizon of five years or more. “Being thematic products, they lack diversification. They can lag when growth slows or inflation and interest rates rise. So, they are not ideal for retirees, cautious savers, or those with short-term needs,” says Ankit Patel, cofounder and partner, Arunasset Investment Services.

 

Thematic funds need well-timed entry and exit. “This can be difficult for retail investors to pull off without professional guidance,” says Alekh Yadav, head of investment products, Sanctum Wealth. Given their cyclical nature and narrow focus, only investors who can track the economic backdrop should go for these funds.

 

Allocation and horizon

 

Experts recommend limiting exposure to 5-10 per cent of an equity portfolio — or up to 12-15 per cent for aggressive investors. “Since diversified funds already hold many consumption stocks, treat these as a supplement, not the core. Given their cyclical nature, entry and exit timings matter more than in the case of broadbased funds,” says Patel.

 

Checklist for picking a fund

 

Investors should evaluate performance across market cycles, portfolio composition, the fund manager’s track record, and expense ratio. “Ensure the fund has adequate size, liquidity, and comes from a fund house,” says Patel.

 

“Investors should look for funds with a solid long-term record, proven managers, and performance tested across bull and bear markets, while ensuring the fund stays true to its consumption theme instead of being managed like a broadly diversified fund,” says Yadav.