'Consumption Funds' - Has India Lost Its Appetite For Consumption? - Outside View by PersonalFN

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'Consumption Funds' - Has India Lost Its Appetite For Consumption?
Sep 13, 2019

As per the latest macro-economic data, private final consumption expenditure (PFCE) growth rate has dropped to 3.1% in June 2019 quarter from 7.2% in March 2019 quarter.

The decline in growth rate is a cause of worry as PFCE accounts for around 55% of the GDP; and therefore, it is an important determinant of the economy's health.

One of the major indicators of slowing consumption is the slump in one of the key sectors -- the auto industry. Auto sales across segments have been declining sharply (in some cases a double-digit decline) over the last 10 months. Market leader Maruti Suzuki's sales in the month of August 2019 were down by 36% on a y-o-y basis.

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However, the low consumption is not just limited to big ticket purchases. As per media reports, people are thinking twice even while spending on daily essentials like toiletries and biscuits. As a result, FMCG heavyweights like HUL, Britannia, and Dabur reported low volume growth in June quarter.

[Read: Why A Slowdown in GDP Matters To You As An Investor?]

The decline in rural and urban income as a result of slowdown in GVA from agriculture and manufacturing has affected the overall consumption in the country.

The current slowdown did not start in the June quarter but over the last few quarters. Consequentially, this has impacted the returns on Consumption Funds.

Let us see how consumption funds have fared over the years.

Table: Performance of Consumption Funds over the years
Scheme Name Returns (%)
1 Year 3 Years 5 Years
Tata India Consumer Fund -12.9 14.01 NA
Mirae Asset Great Consumer Fund -4.37 11.95 12.4
ICICI Pru FMCG Fund -3.88 10 12.19
SBI Consumption Opp Fund -11.33 8.53 11.25
Quant Consumption Fund -11.64 4.72 7.45
UTI India Consumer Fund -11.95 4.64 5.21
Aditya Birla SL Mfg. Equity Fund -13.99 2.46 NA
Reliance Consumption Fund -5.7 1.63 6.15
Direct plan-Growth option considered, 1-year return - absolute, 3-year and 5-year return - compounded annualised
Data as on September 11, 2019
(Source: ACE MF)

As seen in the table above, consumption funds performed poorly in the last one year as the sector reeled with a drop-in consumer sentiment. The performance improved over the longer time horizon of the 3-year and 5-year periods, though only a couple of funds generated impressive returns.

Does this mean India's consumption story is over?


While it is true that the economy is going through a slowdown, the weakness in consumption sector might be temporary and cyclical in nature.

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Talking about the recent slowdown in the FMCG sector in a report, Mr Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said that, "It is pertinent to note that volume growth was dismal, mostly negative for major companies in Q1 FY18 due to which growth in Q1 FY19 was much higher, thereby making the volume figures in Q1 FY20 appear weaker."

According to him, there is a shift in the consumer-buying behavioural pattern with an increasing number of consumers moving towards healthier and natural product options in the unorganised or small business segments. As the FMCG data does not capture the unorganised sector, the data report could be biased.

Various industry leaders voiced a similar opinion, stating that the slowdown is temporary.

With the festival season coming up, the FMCG industry is hopeful of a revival in demand and they are gearing to step-up marketing spends.

Should you invest in consumption funds?

Every sector undergoes a series of outperformance and underperformance during varying economic phases and cycles. No sector can be expected to consistently perform well across market phases. The underperformance/outperformance can be short-lived, or it can last for months/quarters.

The aim of sectoral fund is to identify a sector with good future prospects in the medium to long-term. Earnings in such funds are cyclical in nature; heavy gains may follow heavy losses and vice versa. There is no point in entering the market in such a case after it is already past its growth cycle. Therefore, timing the entry in such funds becomes crucial.

[Read: Are You Waiting For The Right Time To Invest In Equity Mutual Funds? Read This!]

Graph: How are Consumption Funds placed on the risk-return spectrum?
How are Consumption Funds placed on the risk-return spectrum

The above chart shows that sectoral funds carry the highest risk compared to any other fund.

Since the consumption sector is undergoing a slowdown and one expects a turnaround in the future, investing in the sector makes sense. However, one cannot be sure how long the slowdown will continue or how significant the results of the revival will be. Thus, investing in consumption funds is highly risky.

Instead, you should invest in worthy diversified equity schemes that follow an opportunity-based approach. These funds have a flexible investment mandate to invest in sectors/themes that look promising and these are expected to do well in the medium to long-term. This will reduce the risk of concentration towards a particular sector and potentially generate better returns.

Ideally, diversified equity schemes should form part of your `Core portfolio'. The `Core' part can consist of large-cap fund, multi-cap fund, and value style fund and should form 60% of your portfolio holdings.

[Read: Why It Is The Best Time To Build A Strategic Mutual Fund Portfolio To SIP Into]

The 'Satellite' part of your portfolio should include a mid-cap fund, large & mid-cap fund, and an aggressive hybrid fund.

This strategic allocation of portfolio lets you focus on the stable schemes with a long-term view and at the same time capitalise on short-term opportunities. Investments in these schemes should be as per your financial objectives, risk profile, and investment horizon.

If you have a very high-risk appetite, convinced about the growth story of a particular sector, and have faith in the investment philosophy of a fund manager investing in that particular sector, you can allocate a small portion of your portfolio in sectoral funds. This should be only done after the Core and Satellite part of your portfolio is well placed.

Any investor who does not have a very high-risk appetite should completely avoid investing in sectoral funds.

Editor's note: If you are looking for high rewards with moderate risk, consider PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025(2019 Edition)".

With this, you gain access to a ready-made portfolio of top recommended equity mutual funds for 2025 based on the Core & Satellite approach to investing.

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Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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Oct 22, 2019 03:37 PM