How consumption funds are playing the demographic dividend

India is among one of the fastest-growing economies in the world and a strong demographic dividend and growing middle class bode well for the India consumption story. Thematic equity mutual funds focussed on consumption, by investing across varied sectors, have tried to leverage this long-term theme with some success over the years.

However, the Covid-19 pandemic has hit pockets of consumption hard, which is why a majority of consumption-oriented thematic funds have struggled to beat the overall market in the past 1- and 3-year periods. But, over longer periods of time, they still hold an edge over plain-vanilla diversified equity funds.

Over the last decade, barring the Covid hiccup, the consumption sector has seen strong growth. As consumption trends across food, attire, housing, commuting, communication, appliances, entertainment, and healthcare changed, companies linked to consumption were witness to a sharp change in fortunes. As disposable incomes grew in step with the overall economic progress in the country, the average Indian’s propensity to consume rose. The consumption narrative has changed from being viewed as ‘luxury’ by the previous generation to ‘daily use’ by millennials, helping companies become formidable brands.

The thematic consumption funds landscape has over a dozen offerings, with about eight funds, such as SBI Consumption Opp, Nippon India Consumption, ABSL India GenNext and Sundaram Rural & Consumption, having a vintage of 10 years. Consumption funds are predominantly actively managed schemes, though a few asset management companies (AMCs) have been launching passive products through the exchange traded fund (ETF) route in the past few months. The latest to join this bandwagon is Axis Consumption ETF, an open-ended product tracking Nifty India Consumption Index. Its new fund offer period ends September 13.

Portfolio choices

From an investment perspective, consumption focussed equity funds have spread their bets on a wide range of sectors. Across funds, barring a few, investments are done in 12 to 25 sectors, thereby giving an impression of wide diversification. But given that these are thematic funds, the top 5 sector concentration is between 55 and 70 per cent, tying the fortunes of the funds invariably to a few. Across funds, the most preferred sectors appear to be banking/finance, FMCG, auto & ancillaries, retailing, consumer durables, alcohol, chemicals and construction. A handful of funds such as UTI India Consumer, Mirae Asset Great Consumer and ICICI Pru Bharat Consumption have telecom in the top 5 sectors. Quant Consumption, which is the best performer in 1-, 3 and 5-year periods, bet big on realty sector (14.8 per cent) and crude oil (8.4 per cent).

More than 85 per cent of consumption funds invest at least half of their assets in large-cap stocks, while putting the rest in mid-caps compared to small-caps. Funds such as Mahindra Manulife Rural Bharat and Consumption, UTI Consumer and Canara Robeco Consumer Trends have over 60 per cent in large-caps, an indication of playing it safe. On the other end, Sundaram Rural and Consumption, SBI Consumption Opp. and Quant Consumption have the highest allocations to mid-caps (28-32 per cent). Given that small-caps are the riskiest part of the m-cap spectrum, the average allocation here is 16 per cent across consumption funds but SBI Consumption Opp (38 per cent), Quant Consumption (30 per cent) and Mirae Asset Great Consumer (20 per cent) are notable outliers.

Performance

Being thematic funds, consumption funds as a category are more volatile (3-year monthly higher standard deviation of 6.2) than, say, plain-vanilla large-cap funds (SD of 5.7). However, consumption funds are less volatile than mid-cap (SD of 6.7) or small-cap funds (SD of 7.4).

From a pure return perspective, these funds have generated 32-95 per cent gains in the 1-year period, 9-29 per cent CAGR in 3-year period, 11-22 per cent CAGR in 5-year period and 12-18 per cent CAGR in 10-year period. The number of funds generating alpha, i.e. excess return over benchmark (Nifty Consumption TRI), has improved in the last 1-year period — 12 out of 14 consumption funds outperformed the Nifty Consumption index. Over longer periods of 3- and 5-years, though, only half the funds outdid the consumption index.

If you compare consumption funds with a broad market index such as Nifty 50 TRI (up 55 per cent), the picture diametrically changes in the 1-year period, with only three funds outshining the megacap index. Sluggish returns of consumption index heavyweights can partly explain why funds have found it easier to beat the thematic index; ITC and Maruti Suzuki, and below-market gains notched up by HUL, Bharti Airtel and M&M. ITC has among the highest allocations in funds such as ICICI Pru FMCG, Quant Consumption, Tata India Consumer, Mirae Asset Great Consumer and Nippon India Consumption.

Do note that consumption stocks tend be high PE (price to earnings) due to factors such as MNC parentage, defensive nature of businesses and steady growth prospects. For instance, the 30-stock Nifty Consumption index has a PE of 60 times compared to Nifty 50 PE of 26 times only. The PE of fund portfolios ranges from 32 to 93 times.

In the 3- and 5-year periods, only half of the consumption funds have done well vis-a-vis thematic index and broad market indices, which shows the importance of picking the right fund. The picture improves in the 10-year time-frame with 70 per cent of funds beating the consumption index and 89 per cent of funds beating the Nifty 50.