Should one invest in Consumption Mutual Funds?

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Thematic funds invest at least 80% of their assets in equities related to a specific theme. Similarly, mutual funds with a Consumption theme allocate 80% of their portfolio in companies that benefit from increasing consumer demand in the country. In other words, they invest in stocks of companies involved in the business of consumer products or services. This category includes products such as Fast-Moving Consumer Goods, automobiles, telecommunications, and consumer durables. In simple terms, the more products like cars, mobile phones, air conditioners, refrigerators, soap, shampoo, etc., sell, the more advantageous it is for Consumption funds.

The fund managers of Consumption funds identify sectors expected to benefit from the rising consumption trends in the country. They also focus on companies with strong fundamentals. Thematic Consumption funds fall under the equity category of mutual funds, which means they are subject to a 15% tax on gains if you redeem your units within one year. After one year, you’ll need to pay a 10% long-term capital gains tax on capital gains exceeding one lakh rupees in a financial year.

Thematic funds offer the potential for higher returns, but they also come with higher risks. Unlike large-cap, mid-cap, and multi-cap funds that diversify across a wide range of stocks, thematic funds invest in a limited number of stocks based on a specific theme. This concentration in a theme-based investment carries a higher level of risk.

Theme-based investment strategies can yield significant profits, especially if you invest during periods when the economy is favorable to the companies in the fund’s portfolio. However, if there are unexpected changes in the economy, it can have a contrasting impact on these companies’ stocks, potentially leading to short-term losses.

Now, let’s understand the type of returns you can expect from these funds. According to Ace Mutual Fund data as of September 11, 2023, Consumption Mutual Funds have delivered returns of 16% over one year, 24% over three years, and 15% over five years. These returns over the past three and five years demonstrate the opportunities that Consumption Theme presents to fund managers.

So, should one invest in Consumption Mutual Funds? In reality, the aspirations of Indians are on the rise, with significant changes in people’s consumption and spending patterns, aided by digitization. As disposable income increases and the middle-income group continues to expand, consumption in the country is on the rise.

According to HSBC Asset Management Company, Consumption contributes to approximately 60% of India’s GDP, and a significant portion of it lies with listed companies. Therefore, the fund house believes that the future of the Consumption theme is promising.

However, due to being thematic equity funds, Consumption Funds come with higher risks. Therefore, only investors who can commit their funds for a minimum of 3 years and are comfortable with higher risks should consider investing in them. This allows them to withstand the ups and downs that may occur during this period.

Due to the high risks and volatility associated with sector or thematic funds, financial advisors often advise new or less experienced investors to steer clear of them. These schemes depend on the performance of a specific theme, making it challenging to gauge when to invest, stay invested, or exit.

Experts recommend that even experienced investors should allocate only about 10% of their total portfolio to such thematic funds. If you’re unsure about what to do, then consulting a financial advisor can be beneficial.