Consumption is among the most diversified and sought-after themes in Indian equities.
Over the past five years, consumption theme funds have given an annualised category average return of 15.17 per cent, according to the data from Value Research.
But this theme has been affected by the Covid-19 pandemic, which impacted jobs and livelihood.
As the economy grows, the purchasing power of individuals rises.
This pushes consumption demand for various goods and services.
In the initial phases, fast-moving consumer goods (FMCG) benefit, while over a longer period, discretionary goods’ demand catches up.
“Consumption funds constitute a diversified portfolio of companies representing domestic consumption sectors, such as consumer non-durables, FMCG, health care, auto, telecom, pharmaceutical, hospitality, and media & entertainment,” said Arun Kumar, head of research-mutual funds, Fundsindia.com.
Since this is a well-diversified theme, the fund manager can choose from a wide range of stocks to build his/her portfolio.
Fortunes of the theme are not tied to one sector or a handful of companies.
The Covid-19 pandemic has affected the consumption theme over the past year and a half.
The economic slowdown, which led to job losses and loss of income for many, had an impact on consumption demand.
“Non-discretionary products continued to be used during the lockdown, so the FMCG sector fared well during the pandemic.
"Discretionary spending, however, did not keep pace due to uncertainty over job and salary.
"The consumer confidence level, too, was extremely low,” said S Sridharan, founder, Wealth Ladder Direct.
A steady economic revival can provide fresh impetus to this sector.
“If we are able to navigate the effect of the pandemic and the economy continues to open up, it may lead to a strong tailwind for the consumption sector with pent-up demand coming to the fore,” said Tarun Birani, founder and CEO, TBNG Capital Advisors.
Sometimes valuations of consumption funds can be expensive. Consumption-oriented stocks have run up of late, along with others.
Should you invest?
Financial advisors suggest investors remain careful while investing in consumption funds, since these are thematic in nature.
“We do not advocate investing in thematic funds.
"Timing one’s entry and exit is difficult to pull off.
"Also, the fund manager must hold on to stocks from the theme even if they are not doing well,” Sridharan said.
Kumar, too, suggests investing in diversified equity funds, instead of thematic ones.
“The simpler option would be to outsource the choice of themes and sectors to fund managers via well-diversified equity funds.”
According to Sridharan, only investors with a high-risk appetite should invest a maximum of 5-10 per cent of their equity portfolio in thematic funds.
Kumar said aggressive investors who can monitor, track, and time the underlying theme should include these funds in the tactical portion of their portfolio.
Also, buying should be done in a staggered manner using SIP (systematic investment plan) to get the benefit of rupee cost averaging.
However, some experts like Birani share a different view. Birani said: “It’s important for the investor to remain invested in these theme-specific funds at least for five-seven years to enjoy the effect of compounding.”