Is Investing in Consumption Funds a Worthy Proposition Now?

Apr 07, 2020

On March 24, 2020, PM Narendra Modi announced a nationwide lockdown, asking 1.3 billion Indians to stay at home for the next 21 days to curb the spread of coronavirus.

Next morning, on the news I was surprised to see videos of huge crowd outside grocery stores and supermarkets, defying all norms of social distancing.

People have been panic-buying and hoarding essentials as they fear that lockdown will lead to shortage of these products.

As a result, a belief that the FMCG sector will be least affected by the pandemic has led to a surge in prices of FMCG stocks even as stocks of most other sectors have been in deep red.

 

Graph: FMCG stocks surge since the announcement of lockdown

Graph: FMCG stocks surge since the announcement of lockdown
Data as on April 3, 2020
(Source: ACE MF)

But I believe that recent surge in FMCG stocks do not reveal the bigger picture. The fact is, the overall consumption could be hit hard.

The lockdown has turned out to be a nightmare for lakhs of casual (daily wage) workers, many of whom are migrants, as it has snatched away their source of livelihood. Currently, they are stranded in various parts of the country unable to go back to their homes and without any source of income to feed their families.

Trade, tourism, airlines, hospitality, and construction are some of the sectors that have been adversely affected. As a result, some firms have announced layoffs and salary cuts for salaried and contract workers.

[Read: 5 Valuable Money Management Lessons from the Coronavirus Pandemic]

This could have a negative impact on urban consumption. Since many people from urban areas remit money to rural areas, consumption in those areas could also be affected. And as people have been confined to their homes, discretionary spend will take a backseat.

Thus, the overall consumption demand is expected to be low in the coming months, depending on the extent of the lockdown. India's consumption growth was already slowing down; the government undertook several steps to boost consumption growth in the past few months. However, the unforeseen event of this pandemic has acted as a hurdle.

Consumption expenditure accounts for more than 55% of the GDP; and therefore, it is an important determinant of the economy's health. Without growth in consumer spending, manufacturing activity will continue to be muted, which will reflect on corporate earnings growth.

The lockdown could impact the FMCG companies in the coming months due to bottleneck in logistics and transportation. Factories would be working at limited capacity due to unavailability of labour due to safety measures announced by government. Consequently, these companies could report weak earnings growth.

That said, since FMCG is considered an evergreen sector, it may bounce back faster than other sectors. Government efforts like direct benefit transfers, food security, higher wages, welfare funds, etc. could help in bringing back consumer sentiments of the poor citizens.

Does this make an opportune time to invest in consumption funds to benefit from the potential recovery?

It is been a while that consumption has been slowing down and the current situation warns that recovery could take time. However, one cannot predict a timeline or quantum of recovery. Thus, investing in consumption funds to benefit from the revival in the sector could be risky.

Besides, most consumption funds have not generated impressive returns in the past.

[Read: What Could Be the Potential Impact of a Lockdown on Your Mutual Fund Portfolio? Know Here...]

Table: Performance of Consumption Funds has not been impressive

Scheme Name Absolute (%) CAGR (%)
YTD 1 Year 3 Years 5 Years
ICICI Pru FMCG Fund -17.57 -14.58 3.21 6.08
Mirae Asset Great Consumer Fund -28.49 -22.38 2.47 4.71
SBI Consumption Opp Fund -28.80 -30.31 -2.62 3.84
Quant Consumption Fund -24.98 -27.92 -7.08 2.09
UTI India Consumer Fund -23.19 -17.47 -2.15 0.84
Aditya Birla SL Mfg. Equity Fund -22.13 -22.54 -6.70 0.48
Nippon India Consumption Fund -24.74 -19.76 -6.99 0.47
Tata India Consumer Fund -19.84 -17.78 3.82 NA
Data as on April 3, 2020
Returns are point-to-point. Direct plan - Growth option considered
(Source: ACE MF)

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.

If you endeavour to build wealth, you need to devise a sensible strategy. The 'Core and Satellite' approach is one of the most successful and time-tested investment strategy followed by some of the most successful equity investors.

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

The `Satellite' part of your portfolio should include a mid-cap fundlarge & 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 capitalise on short-term opportunities simultaneously. Investments in these schemes should be as per your financial objectives, risk profile, and investment horizon.

If you wish to invest in a readymade portfolio of top recommended equity mutual funds based on the 'Core & Satellite' approach to investing, I recommend that you subscribe to PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025 (2020 Edition)".

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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.

If you do not have a very high risk appetite, you should completely avoid investing in sectoral funds.

 

Warm Regards,
Divya Grover
Research Analyst

 

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