- Consumption funds invest in stocks of consumption-oriented companies
- Even as these companies are poised for good growth, you should allocate only 5-10% of your portfolio here - Read this post to know the investment rationale
There are various kinds of themes on which mutual fund schemes exist. Some of these themes are PSU equity funds, dividend yield funds, MNC funds, etc. Likewise, there are mutual funds based on the consumption theme. Let us understand them better.
What are Consumption Thematic Mutual Funds?
As the name suggests, these funds invest in sectors that are consumption-oriented. Some of the consumption-oriented sectors are Automobiles, FMCG (Fast-moving Consumer Goods), Consumer Durables, Telecom, Financial Services, etc. Thus, these funds invest in consumer-facing companies that produce goods or offer services used by many consumers.
Though every sector can be called a consumption sector because at the end of the day any product or service being offered is used by a consumer, but in some sectors, consumers don’t buy directly from those companies, they consume it indirectly. For e.g. metals as a sector has companies producing aluminium, steel, zinc, etc, but these are not directly bought by consumers from these companies. Hence, metals do not qualify as a consumption-oriented sector.
Some examples of consumption-oriented companies that are listed on the stock exchange are Hindustan Unilever, ITC, Nestle, Maruti Suzuki, Tata Motors, Bharti Airtel, SBI, HDFC Bank, Whirlpool. All these companies sell products or services bought by millions. Consumption thematic mutual funds invest in such companies. But what are the benefits of investing in such a fund? Let us understand that.
What are the Benefits of Investing in Consumption Funds?
Growth Potential – Most of the consumer companies offer high growth potential since they cater to a large population in India with high demand. With a rising GDP and per capita income, consumption will always remain a strong theme, thus having a positive impact on consumption funds.
Longevity – Most of the large consumption-oriented companies have been in business for long and have stood the test of times in different economic conditions. Going forward as well, these companies equipped with a robust business model will have a long runway ahead.
Returns – Most of the consumption-oriented stocks such as ITC, HDFC Bank, HUL, Nestle and many others have compounded wealth at 15% + since their start of operations. Consumption-oriented stocks have been one of the best wealth creators over decades which is evident in the long-term returns of consumption funds.
Stability – Consumption-oriented companies are generally stable and have health financials. Most of the companies in this space have strong business models and widespread distribution.
Should You Invest in Consumption Thematic Funds?
Consumption has a very long way to go in India with high growth potential. When we compare with the developed nations, penetration of cars, air conditioners, washing machines, banking products is still very low. Thus, these companies have a long runway ahead and businesses, which have a solid business model, will witness high growth in revenue and profits translating into higher stock prices and higher NAVs for consumption funds.
We recommend adding a small part of your portfolio (5-10%) if you wish to invest in a thematic fund. Among various thematic funds, consumption funds are the best option. However, it is important to have a long-term horizon in mind. One can start a SIP or invest in lumpsum as well. To know the best consumption funds, you can read another post of ours-Five best consumption mutual funds to invest
You can get exposure to good consumption companies/stocks through other diversified equity funds as well. If you want to own these companies, you can do so by investing in multi-cap, large, mid or small-cap funds as well. In this case, you can avoid investing in a consumption thematic fund.
To know the best funds in each category, you can read these posts of ours:
Best performing multi-cap funds-https://www.wishfin.com/mutual-fund/five-best-performing-multi-cap-funds-to-invest-in/
Best performing large-cap funds-https://www.wishfin.com/mutual-fund/three-best-large-cap-mutual-funds/
Best performing mid-cap funds-https://www.wishfin.com/mutual-fund/five-best-performing-mid-cap-funds-to-invest-in/
Best performing small-cap funds-https://www.wishfin.com/mutual-fund/which-are-the-best-small-cap-funds-to-invest-in/