Over the years, one of the key parameters I’ve used to gauge the trajectory of the market has been consumption patterns. More often than not visible discretionary spending is a sign of an economy on the upswing and the stock-market usually would have discerned and discounted it early. It is in this context that I find Consumption mutual funds offered by Asset Management Companies (AMCs) and their holdings interesting.
By definition, consumption funds are thematic mutual funds that invest in companies directly connected to consumer spending. These funds focus on businesses that produce or sell goods and services used in daily life. This includes sectors like food and beverages, clothing, automobiles, consumer electronics, retail, hospitality, personal care and entertainment besides other segments.As consumption rises, the companies that provide these goods and services tend to grow more profitable.
One of the key reasons investors consider consumption funds is the relatively stable and predictable nature of consumer demand. While other sectors like technology or infrastructure may undergo cyclical swings, consumption usually tends to grow,unless the economy itself is on the downswing. During periods of economic growth, these businesses often see faster revenue and profit growth. During challenging times, they tend to hold up better than other sectors.
Consumption funds usually invest in companies that have strong brand recognition, wide distribution networks, and loyal customer bases. These companies often enjoy pricing power, suggesting they can increase prices without losing customers. This helps them protect their profits even when input costs rise. Many of these businesses have been around for decades and have shown consistent growth over time. This gives investors confidence that they are putting their money into companies with proven track records.
However, consumption funds come with their own set of risks. Since they focus on a single theme, these funds are not as diversified as regular equity mutual funds. If overall consumption drops, the fund’s performance may suffer. Factors such as inflation, changes in government policy, weak rural income or an economic slowdown can negatively impact consumer demand. It is also worth noting that consumption patterns evolve over time and if a fund manager is caught wrong-footed when there is a shift in consumption pattern, there could be a price to pay for investors.
Consumption mutual funds are generally more suitable for those with belief in the country’s long termgrowth story, of which consumption is a natural corollary. Consumption funds provide exposure to well-known brands and businesses and thus, they can be a rewarding part of a long-term diversified investment strategy.
For younger investors as well as those with a reasonable risk appetite, consumption funds can be worth a look-in albeit with the time-tested caveat that one with need to bide time to derive optimal returns from these funds as consumption stocks generally do not come cheap and are thus more suited to a growth rather than value investment strategy. Simply put, if you invest in these funds, then be patient and stay the course.
(Ashok Kumar heads LKW India. The views expressed here are his own)