There are various types of mutual funds, which can cause confusion among investors. They are divided based on the features, type, returns, etc., and consumption funds are one of them. These funds are classified as equity funds but have a unique feature. The growth depends on consumer spending and is volatile in nature.
This article will help you understand a consumption mutual fund in detail by highlighting its features, pros, cons, and suitability.
What are Consumption Mutual Funds?
The kind of equity mutual fund that focuses on investing in companies that meet consumer demand is the consumption mutual fund. This encompasses industries such as retail, automotive, entertainment, travel, lifestyle, and FMCG (fast-moving consumer goods).
The concept is straightforward that businesses in these industries typically do well as people’s incomes and spending rise, which could increase the fund’s returns. These funds focus on domestic consumption and are particularly well-liked in developing nations like India, where GDP growth is largely driven by consumption.
Key features:
- Thematic Investment: These funds invest in businesses that profit from rising consumer spending and have a consumption-focused theme.
- Sector Concentration: A small number of industries, including retail, consumer durables, entertainment, cars, and fast-moving consumer goods, receive a lot of attention.
- Equity-Dominated Portfolio: These funds are appropriate for long-term growth because they usually allocate more than 65% of their investments to stocks.
- Sensitive to Economic Trends: Inflation, income trends, and consumer sentiment all have a significant impact on fund performance.
- Moderate to High Risk: These funds may be more volatile than diversified equity funds because of their limited sector diversification.
Pros and Cons of Consumption Mutual Funds
Let us understand the downside of these funds:
Pros
- Taking Advantage of Growing Consumerism: Consumer spending rises with economies and urbanisation. You can profit directly from that trend with these funds.
- Strong Brands in Portfolio: A lot of consumption funds put their money into reputable businesses with strong brand values and devoted clientele.
- Defensive During Slowdowns: Essential consumption sectors like FMCG often show stability during economic slowdowns, but discretionary consumption sectors such as entertainment or automobiles may remain volatile and more sensitive to economic downturns.
- Relevance and Simplicity: Investors can more easily relate to the products they are investing in because everyone is familiar with consumer brands.
Cons
- Sector-Specific Risk: A slowdown in these industries could affect returns because the fund is concentrated on businesses involved in consumption
- Limited Diversification: These funds do not distribute risk across all industries, in contrast to diversified mutual funds
- Can Underperform in Bull Markets: Consumption funds may underperform if a market rally is led by sectors such as technology, infrastructure, or banking, since these are not the primary focus of consumption funds.
- Impact of Inflation: Companies in the fund’s portfolio may suffer if consumer demand is weakened by high inflation.
Who Should be Investing in Consumption Mutual Funds?
1. Perfect for Investors Taking Advantage of India’s Urbanisation and Growth
- India’s population is becoming younger and more urbanised, which is driving up consumer demand for products and services like smartphones and eating out.
- This is a long-term trend that consumption funds are well-positioned to profit from.
- Through this theme, investors who have faith in India’s domestic consumption boom can get involved.
2. Excellent for People Who Use SIPs to Achieve Long-Term Objectives
- Investors can accumulate wealth for future milestones, such as a child’s education or retirement, by using Systematic Investment Plans (SIPs) in consumption funds.
- Long-term holdings of these funds enable consumer-facing businesses to expand.
- Additionally, they aid in balancing out market volatility, particularly in industries that rely heavily on demand.
3. Fit for a Diversified Portfolio as a Thematic Add-On
- A modest allocation (10–15%) to consumption funds can provide thematic exposure to your portfolio if it is already diversified with large-cap or index funds.
- This allows you to invest in industries like retail, lifestyle, and FMCG without taking on too much risk.
- It offers both growth from changing consumer trends and stability from necessities.
4. Ideal for Investing in Common Brands
- You are already a part of the consumer economy if you frequently shop at DMart, use Colgate, eat Maggi, or watch Netflix.
- By investing in consumption mutual funds, you can acquire stock in the businesses that produce the goods you use on a daily basis.
- Investing may seem more interesting and meaningful because of this familiarity.
5. Not Designed for High-Risk or Short-Term Use
- Not Suitable for High-Risk or Short-Term Momentum seekers
- During a bull run, these funds might not provide the same rapid or aggressive returns as tech or sector-specific funds.
- They emphasise consistent, long-term growth fuelled by customer demand.
| Investor Type | Consumption Mutual Fund Suitability |
| Long-term investors (5+ years horizon) | Highly Suitable |
| SIP investors with financial goals | Suitable |
| Beginners in mutual funds | Moderately Suitable |
| High-risk or short-term traders | Not Suitable |
| Brand-conscious or lifestyle-aware investors | Suitable |
Bottomline
The conclusion can be drawn that consumption of mutual funds is suitable for long-term investors with moderate to high risk-bearing capacity. Each one of us is a consumer in one way or the other. So, this theme-based investing helps you profit from the spending you make on buying such goods indirectly. GDP growth in India is comparatively good as it is a growing country, which ultimately helps in the growth of consumption mutual funds.
However, it is suitable for long-term investors, so it is important to analyse your investing needs and then choose wisely.