Consumption Funds: Meaning, Types & Benefits

India will be one of the world's second-largest consumer markets by 2030 , thanks to economic growth and a fast-expanding middle class. This growth can potentially generate attractive opportunities for investors to invest in consumer-driven opportunities through a niche class of theme mutual funds - consumption funds. Before you invest, you should know what a consumption fund is, how it operates, its advantages, and the risks associated with it.

What is a Consumption Fund?

A consumption fund is a kind of thematic mutual fund. It invests in businesses that manufacture goods and services that we consume on a daily basis. Thematic funds are equity-based schemes centred around a particular theme. While a larger theme, such as infrastructure, may include cement, power, and steel firms, a consumption mutual fund centres around businesses driven by consumption.

Some areas that consumption funds are invested in include fast-moving consumer goods (FMCG), automobiles, consumer durables, travel, telecommunication, electronics, and fashion. Both discretionary goods, for instance, cars and luxury items, and essentials, for example, groceries, clothes, and health, are covered by these funds.

Diversified consumption funds can offset growth potential from economic highs with stability during less robust economic times from demand in necessity goods. The value of such funds is reflected in their Net Asset Value (NAV), which goes up if the underlying companies' stocks appreciate.

Types of Consumption Funds

Consumption funds may concentrate on various consumer-oriented industries such as:

• FMCG-Focused Funds

  Invest in manufacturers of staples like packaged foods, beverages, home cleaning products, and personal care products. Consumption of these staples continues even during economic downturns, which makes them comparatively strong.

• Automobile-Oriented Funds

  Invest in automobile makers and auto-component makers. The industry gets support from increasing consumer demand, urbanisation, and advancements in mobility technology.

• Banking and Financial Services Funds

  Comprise banks and financial institutions offering loans, credit cards, and other services that enable consumer spending. The development of this industry is directly related to increasing disposable incomes and economic growth.

• Telecom and Technology Funds

  Invest in companies providing communication, internet, and digital services. Due to increased smartphone use and internet connectivity, this sector keeps growing at a strong pace.

Advantages of Consumption Fund Investment

A consumption mutual fund can provide a number of benefits for an investor looking to capitalise on India's expanding consumer economy:

• Growth Prospects: Consumer-centric businesses have the potential to grow with rising incomes and purchasing power. These funds allow an investor exposure to industries expected to have long-term growth.

• Reliability on Necessities: Even as discretionary spending is affected by the business cycle, necessities like food, apparel, and health are relatively stable in their demand.

• Access to Market Leaders: Consumption funds offer top companies that rule their respective industries, giving exposure to established and well-known businesses.

• Broad Investment Horizon: The consumption theme covers a wide range of industries, allowing investors to get exposure to various opportunities in one theme.

• Professional Management: Fund managers research and rebalance portfolios proactively to reflect trends in the market, allowing investors to easily invest in companies of high potential without having to select individual stocks.

Risk Factors Involved with Thematic Consumption Funds

Though compelling in its benefits, thematic mutual funds such as consumption funds also involve greater risks than extensively diversified equity funds:

• Concentration Risk: Because the funds concentrate on one theme, down performance in the sectors can have an effect on returns.

• Market Sensitivity: The performance depends on overall economic health. Discretionary sectors may not do well during downturns.

• Shift in Consumer Preferences: A shift in lifestyle and technological trends can influence demand for specific products and the performance of the manufacturing companies of such products.

• Regulatory and Economic Factors: Changes in the existing government policies, interest rates, and inflation might influence consumer demand, and therefore, overall profitability.

Who Should Invest in Consumption Funds?

Consumption funds are best suited for investors who:

• Seek long-term capital appreciation and can tolerate higher risk.

• Want to participate in India’s growing consumer market.

• Understand that returns may be more volatile compared to diversified equity funds.

For a regular investment tool, consider SIP. It can help ease short-term market volatility while allowing investment diversification.

How to Invest in Consumption Funds

There are several ways of investing in a consumption mutual fund:

• Directly with Asset Management Companies (AMCs): By visiting the website or office of the AMC and choosing the preferred consumption-themed scheme.

• Online Investment Platforms: A number of online platforms provide information on an array of funds. Investors can compare and invest with ease through a single platform.

• Financial Advisors or Distributors: Investors who want expert advice on making the right investment decisions based on their financial objectives and risk capacity can consult financial advisors.

Factors to Consider Before Investing

Before investing in a consumption fund, remember the following::

• Risk Tolerance: If you have a lower tolerance for risk, the focused nature of thematic funds might not be for you.

• Investment Horizon: You need a long-term perspective (a minimum of 5 years) to bear with the short-term market ups and downs.

• Portfolio Diversification: Since consumption funds are based on a single theme, diversify your portfolio with other debt and equity investments.

• Fund's Investment Approach: Go through the scheme's philosophy of investing, stock selection approach, and suitability for your objectives.

• Historical Performance and Expense Ratio: Stable performance during market cycles and an affordable expense ratio are essential aspects to consider.

Conclusion

Consumption funds allow investors to capitalise on India's expanding consumer economy. By focusing on companies that produce goods and services consumed daily, they integrate potential in both necessity and discretionary spending categories.

That said, their thematic character implies they have greater risks, such as concentration and market sensitivity. They are best suited for high-risk appetite investors with a long-term perspective and looking forward to having investments aligned with the consumption growth of the country. Thorough proper research and evaluation of the fund's investment strategy, portfolio composition, and manager's track record is essential before committing capital.

Disclaimers:

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision.

Past performance may or may not be sustained in the future. Please read the Scheme Information Document (SID) and Key Information Memorandum (KIM) carefully before investing.

Sources: https://economictimes.indiatimes.com/news/india/indias-consumer-market-to-become-worlds-second-largest-by-2030-report/articleshow/117721641.cms?from=mdr

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.