Consumption funds: Budget boost and young spenders to drive theme

The Budget's tax cuts, with an estimated revenue foregone of Rs 1 lakh crore, are expected to improve sentiment and have a multiplier effect on consumer demand

The large tax relief announced in the Union Budget is likely to boost consumption, with taxpayers expected to channel a significant portion of their savings into goods and services. This is likely to provide a fillip to both consumption stocks and consumption-themed funds. Currently, 30 such funds hold assets under management (AUM) worth Rs 36,826 crore. 

A broad theme 

The consumption theme is diverse, encompassing fast-moving consumer goods, automobiles and components, consu­mer services, telecom, con­su­mer durables, healthcare, power, realty, and lending businesses (as they facilitate spending). Eme­rging tech companies in food delivery and healthcare services also fall under this theme. 

 

Driven by rising incomes 

The Budget’s tax cuts, with an estimated revenue foregone of Rs 1 trillion, are expected to improve sentiment and have a multiplier effect on consumer demand. “Low-ticket consumer discretionary and travel should do well. Segments such as beauty and personal care, jewellery, quick service restaurants (QSRs), alcoholic beverages (alcobev), and apparel should see a consumption boost. Consumers can even leverage the amount, so consumer lending businesses should do well,” says Mahesh Patil, chief investment officer (CIO), Aditya Birla Sun Life Asset Management Company (AMC). 

Consumption is likely to be a long-term theme. “Consumer businesses are set to thrive driven by rising disposable incomes, urbanisation, digitalisation, easy credit, and demographic dividend,” says Radhika Gupta, managing director (MD) and chief executive officer (CEO), Edelweiss Mutual Fund, which recently launched the Edelweiss Consumption Fund. 

Consumption stocks lagged behind infrastructure and business-to-business (B2B) sectors during the post-pandemic rally. “Valuations are relatively reasonable. We remain optimistic that consumption trends should be better over the next two to three years compared to the past couple of years,” says Amar Kalku­ndrikar, fund manager, equity investments, Nippon India Mutual Fund. 

India’s large youth population, aspiring for a better quality of life, is expected to drive consumption. Premiumisation and a preference for branded goods make it a structural growth story. “Consumption funds capture demographic shifts, such as Gen Z spending patterns. The rising middle class aspires to better food, clothing, automobiles, education, and travel,” says Ravi Kumar TV, founder, Gaining Ground Investment. 

 

Over leverage risk

  The consumption theme is not without risks. One threat arises from overleveraging. “If interest rates continue to be higher and consumer debt remains high (personal loans, credit card debt, etc.), discretionary spending will slow down,” says Ravi Kumar.

High inflation and interest rates also reduce purchasing power. Discretionary spending also gets hit during economic downturns.  Kalkundrikar highlights that global macroeconomic factors and capital flows could create additional headwinds. “The pace of demand recovery is likely to be gradual and is unlikely to be uniform across categories,” he says. 

Investment tips

  The level of  exposure to these funds should depend on the investor’s risk appetite. “Those with higher risk appetite should have at least 25-30 per cent of their corpus in thematic funds, and within this, a portion should be allocated to consumption fund(s),” says Patil. Those with moderate appetite should allocate 15-20 per cent of their equity portfolio to thematic funds. 

Investors should also select funds that match their risk profile. “Bear in mind that many new consumer businesses belo­ng to the mid- and smallcap segment,” says Ravi Kumar. Finally, invest in these funds through the systematic investment plan route with at least a seven-year horizon.