Sectoral Bets: Is Consumption Funds a Long-Term Play?
With changing consumer behavior and a growing Indian economy, investors are moving towards sectoral and thematic investment funds. Of these, consumption funds have become popular owing to India’s rising income levels, changing lifestyles, and urbanization. However, can investors consider investing in the Indian consumption story through consumption funds, or is it merely the flavor of the year? In this blog, we will explore what consumption funds are and whether they are a good choice for a long-term investor.
Overview of Consumption Funds
Consumption funds are thematic mutual funds that invest primarily in the businesses that directly meet consumer needs. These funds invest in companies that produce goods and services consumed daily, i.e., food, drinks, personal care products, cars, and telecom products. The consumption fund’s future depends on the daily needs of the consumer.
Businesses that produce these products have the potential to deliver attractive returns to investors due to the increasing consumer demand. Investors seeking to be part of India’s growth story can invest in a consumption fund, including: Tata India Consumer Fund, Nippon India Consumption Fund, and Mahindra Manulife Mutual Fund.
What makes Consumption Funds a Long-Term Play?
Several reasons make consumption funds an attractive investment option for long-term investors. Some of those reasons are listed below:
India’s Demographic Tailwinds
India is a young nation, in an urbanising phase, and with a gradually rising level of income per capita. This demographic privilege is special because it implies an increase in the number of consumers, and hence, their need for more goods and services, which in the long term can result in prolonged gains in the consumption sector in the next several decades.
Structural Economic Shifts
Consumption trends are becoming more diversified with government reforms, increasing formalization, digitalization of retail, and growth in credit. These developments create an exciting opportunity for companies in this industry to achieve long-term growth.
Relative Stability
During the market downturns, many consumption-linked sectors, especially FMCG, are viewed as relatively less vulnerable to impact. These segments are slightly more defensive than cyclical sectors like metals or real estate because people will still need to buy necessities even in times when the economy is slowing and consumer spending is decreasing.
Growth Potential
In most cases, consumption-oriented businesses experienced steady growth, as there is constant demand from consumers. As GDP and per capita income increase in a country, consumer spending increases, and this directly benefits consumption funds. This steady demand makes consumption funds an attractive long-term investment option.
Long-Term Wealth Creation
Historically, major consumption-oriented companies have produced steady returns, an indication of their ability to create long-term wealth for investors. Consumption funds offer safe and long-term investment opportunities, ideal for investors who want consistent returns with lower risk. They are especially suited to investors with a longer time horizon, as they help to erode market volatility.
Portfolio Diversification
A consumption fund can be used to diversify a portfolio by providing exposure to the companies in key and high-demand industries. Because they have exposure to a variety of consumer-driven sub-sectors, consumption funds offer diversification within a specific segment, but they are not immune to the concentration risk associated with investing in that particular segment.
Conclusion
Consumption funds offer investors a unique opportunity to invest in the expanding consumer industry by investing in essential commodities and services. They provide stability, growth, and opportunity to accumulate wealth in the long term. These investments may present attractive results in the long term, but are susceptible to market fluctuations and government regulations. Consumption funds can be a valuable addition to an investment portfolio after thorough research and alignment with personal financial goals.
