The significant tax relief announced in the Union Budget is expected to boost consumption, with taxpayers likely to invest a large portion of their savings in goods and services. This could benefit both consumption stocks and consumption-themed funds, which currently manage assets worth Rs 36,826 crore across 30 funds.
A Broad Theme
The consumption theme is wide-ranging, covering sectors like fast-moving consumer goods, automobiles and components, consumer services, telecom, consumer durables, healthcare, power, real estate, and lending businesses that enable spending. Emerging tech companies in food delivery and healthcare services also fall within this theme.
Driven by rising income
The tax cuts in the Budget, with an estimated revenue loss of Rs 1 trillion, are expected to enhance sentiment and create a multiplier effect on consumer demand. "Sectors like low-ticket consumer discretionary, travel, beauty and personal care, jewelry, quick service restaurants (QSRs), alcoholic beverages (alcobev), and apparel are likely to experience a surge in consumption. Consumers may also leverage this amount, which should benefit consumer lending businesses," says Mahesh Patil, Chief Investment Officer (CIO) at Aditya Birla Sun Life Asset Management Company (AMC).
Consumption is expected to be a long-term trend. “Consumer businesses are set to thrive driven by rising disposable incomes, urbanisation, digitalisation, easy credit, and demographic dividend,” says Radhika Gupta, managing director (MD) and chief executive officer (CEO), Edelweiss Mutual Fund, which recently launched the Edelweiss
Consumption Fund
Consumption stocks underperformed compared to the infrastructure and business-to-business (B2B) sectors during the post-pandemic rally.“Valuations are relatively reasonable. We remain optimistic that consumption trends should be better over the next two to three years compared to the past couple of years,” says Amar Kalkundrikar, fund manager, equity investments, Nippon India Mutual Fund.
India's large youth population, striving for a better quality of life, is poised to drive consumption. The shift toward premium products and a growing preference for branded goods position it as a long-term growth story.“Consumption funds capture demographic shifts, such as Gen Z spending patterns. The rising middle class aspires to better food, clothing, automobiles, education, and travel,” says Ravi Kumar TV, founder, Gaining Ground Investment.
The risk of overleveraging
The consumption theme is not without its risks, with one major concern being the potential for overleveraging.“If interest rates continue to be higher and consumer debt remains high (personal loans, credit card debt, etc.), discretionary spending will slow down,” says Ravi Kumar.
High inflation and interest rates erode purchasing power, while discretionary spending tends to decline during economic downturns.
Kalkundrikar highlights that global macroeconomic factors and capital flows could create additional headwinds. “The pace of demand recovery is likely to be gradual and is unlikely to be uniform across categories,” he says.
Investment Tips
The level of exposure to these funds should be based on the investor’s risk tolerance.Those with higher risk appetite should have at least 25-30 per cent of their corpus in thematic funds, and within this, a portion should be allocated to consumption fund(s),” says Patil. Investors with a moderate risk appetite should allocate 15-20 percent of their equity portfolio to thematic funds.
Investors should also choose funds that align with their risk profile. “Bear in mind that many new consumer businesses belong to the mid- and smallcap segment,” says Ravi Kumar. Lastly, invest in these funds through a systematic investment plan (SIP) with a minimum investment horizon of seven years.
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