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A complete guide to consumption funds

A complete guide to consumption funds

Have you ever purchased a product from leading companies like Maruti Suzuki, Hindustan Lever, Procter & Gamble, or ITC? If yes, you’ve contributed to their growth, which serves as the foundation of consumption funds. 

Consumption funds are a niche category of mutual funds that invest in companies benefiting directly from India’s consumption trends. Here’s a detailed look at what consumption funds are, their key benefits, and who should consider investing in them.

What is a consumption fund?

Consumption funds are thematic mutual funds that invest primarily in businesses dependent on consumer demand. These funds focus on companies that produce goods or services used in daily life or that gain from rising discretionary spending. As consumer spending increases, the revenues and profits of these companies grow, potentially boosting investor returns.

The categories of companies included in a consumption fund portfolio are:

  • Fast-Moving Consumer Goods (FMCG): Food, beverages, personal care items, household essentials
  • Automobiles and two-wheelers
  • Consumer durables: Electronics, appliances, mobile phones
  • Retail and e-commerce companies
  • Hospitality and travel services
  • Entertainment and media firms
  • Healthcare and pharmaceuticals
  • Apparel, footwear, and lifestyle brands

Consumption funds combine both essential consumption sectors, such as food and healthcare, and discretionary sectors, such as automobiles and lifestyle products. As a result, you have a diversified exposure to India’s consumer-driven growth.

Also, read – Fair market value – Meaning and how to calculate it

Benefits of consumption funds

In India, consumption funds offer several benefits. Being aware of these can help you make an informed investment decision. 

Exposure to India’s strong domestic demand

India’s GDP growth is heavily supported by private consumption, which accounts for more than half of the country’s total output. With rising incomes, urbanization, and a young working population, consumer spending is expected to grow consistently for decades. Consumption funds allow you to benefit from this powerful structural trend.

Well-diversified across multiple consumer sectors

Unlike sector funds that focus narrowly on one industry, consumption funds cover multiple consumer-facing categories, like FMCG, retail, healthcare, durables, entertainment, and more. This diversification helps reduce risk arising from a slowdown in any single industry.

Ideal for long-term wealth creation

As consumption growth is a long-term theme, these funds are suitable for investors who wish to accumulate wealth steadily over 5 to 7 years or more. Historically, companies in consumption-driven sectors have delivered stable earnings growth, translating into consistent long-term returns.

Beneficial for portfolio diversification

Adding a consumption fund to an investment portfolio can offer some stability because a portion of the theme (like FMCG and healthcare) is relatively defensive. However, since it is still a thematic equity fund, it should be used as a tactical allocation rather than a core holding. A small tactical allocation can help diversify a portfolio that is heavily tilted toward high-risk or cyclical growth sectors.”Professional fund management

Consumption funds are actively managed by experienced fund managers who carefully select consumer-focused stocks based on financial performance, growth prospects, and industry trends. You can gain access to expert-driven strategies without having to track individual companies.

Also, read – What are Income Plus Arbitrage Fund of Funds?

Who should invest in consumption funds?

Consumption funds are not ideal for everyone. They are thematic investments, which means they carry concentration risk and depend heavily on the performance of the consumption sector. 

Here are the types of investors who should invest in them:

  1. Long-term investors seeking growth

These funds work best if you have a long-term horizon of at least 5 to 7 years. Since consumption-led growth is structural and plays out over several years, long-term investors can benefit from compounding and sectoral expansion.

  1. Investors looking for thematic exposure

If you prefer thematic investing or betting on specific economic trends, consumption funds offer a focused but diversified way to participate in India’s consumption boom.

  1. Individuals wanting to diversify their equity portfolio

 You can use consumption funds as a tactical allocation within your core portfolio rather than as a primary long-term core holding. 

Also, read – Specialised Investment Funds (SIFs) – All You Need to Know About

Conclusion

Consumption funds allow you to benefit from India’s rising consumer demand across essential and discretionary sectors. They provide exposure to a long-term structural theme backed by rising incomes, demographic shifts, and evolving lifestyles. While there are associated thematic risks, they can be a powerful addition to a diversified portfolio, especially if you’re seeking long-term growth, moderate stability, and focused exposure to everyday economic activities.

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FAQs

Are consumption funds risky?

Consumption funds carry moderately higher risk. While essential sectors such as FMCG and healthcare offer stability, discretionary sectors depend on economic conditions. As a thematic fund, they are riskier than diversified equity funds but moderately safer than sector-specific funds.

What is the ideal investment horizon for consumption funds?

You can stay invested in consumption funds for 5 to 7 years or more to benefit from long-term consumption growth trends and reduce the impact of short-term market fluctuations.

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