What are Consumption Mutual Funds

How do Consumption Mutual Funds work?

Fund managers of consumption funds identify and invest in a portfolio of stocks from various consumer-facing industries. The stock selection is based on the potential for growth driven by consumer spending trends and economic expansion.

These are actively managed funds where the fund manager continuously tracks market trends and company performance. They adjust the portfolio by buying or selling stocks to maximise returns from the consumption theme.

Should I invest in Consumption Mutual Funds?

Investing in consumption funds is suitable for those who believe in the long-term potential of India's domestic consumption growth. These funds offer a way to participate in the growth of various consumer-centric sectors through a single investment.

However, as thematic funds, they carry higher concentration risk compared to diversified equity funds. They are ideal for investors with a moderately high risk appetite and an investment horizon of at least 5-7 years.

How to choose the best Consumption Mutual Fund for my portfolio?

Choosing the right consumption fund involves evaluating a few key factors. Look at the fund's historical performance over different time frames, but remember that past performance does not guarantee future returns.

Also, consider the fund's expense ratio, as a lower ratio means more of your returns are retained. It is also important to assess the fund manager's experience and the overall Assets Under Management (AUM) of the fund.

What are the benefits of investing in a Consumption Mutual Fund?

Tapping into India's Growth Story: These funds directly invest in companies that are at the forefront of India's economic growth. As the economy expands and lifestyles improve, consumer spending increases, which can lead to strong returns for these companies.

Sectoral Diversification: While focused on a single theme, consumption funds invest across multiple sectors like automobiles, retail, FMCG, and financial services. This provides diversification within the consumption theme, reducing dependency on a single industry.

Potential for High Growth: Consumer-driven companies often have high growth potential, especially in a developing economy like India. Investing in these funds can offer the potential for capital appreciation that outpaces broader market indices over the long term.

Consumption Funds: Market Insights (Last 6 Months)

Top AUM Growth: The Nippon India Consumption Fund - Direct Plan - Growth Plan led with an impressive AUM addition of ₹230.66 crore, highlighting strong investor interest.

Top Stock Addition: Vishal Mega Mart Ltd was added by 10 different Consumption Mutual Funds, underscoring its growing appeal as a promising investment in the sector.

Notable Exit: In a sign of shifting strategy, Chalet Hotels Ltd was exited by 3 out of 21 Consumption Mutual Funds, reflecting a cautious stance from some managers.

Sector Allocation Shifts: The category has increased its allocation towards energy, real estate, and basic materials, while reducing exposure to securitise, tech, and industrial sectors.

Difference Between Large Cap, Mid Cap and Small Cap Mutual Funds

The primary difference lies in the market capitalisation of the companies they invest in. Large-cap funds invest in the top 100 companies, offering stability. Mid-cap funds invest in the next 150 companies, balancing risk and return.

Small-cap funds invest in companies ranked 251st and below, offering high growth potential but also carrying the highest risk. Consumption funds, being thematic, can invest across all these market caps, depending on the fund's mandate.

How much tax do I have to pay on Consumption Mutual Funds?

Gains from consumption funds are taxed like any other equity mutual fund. If you sell your units within one year, the gains are considered Short-Term Capital Gains (STCG) and are taxed at a flat rate of 15%.

If you hold your units for more than one year, the gains are classified as Long-Term Capital Gains (LTCG). LTCG up to ₹1 lakh in a financial year is tax-free, and any gain above this limit is taxed at 10% without indexation benefits.

Consumption Mutual Funds vs. Other Categories

Unlike diversified funds like flexi-cap or multi-cap funds that invest across all sectors, consumption funds concentrate their investments in consumer-related industries. This thematic focus can lead to higher returns when the theme performs well, but also higher risk.

Compared to other thematic funds like technology or infrastructure funds, consumption funds are often seen as less cyclical. Consumer demand, especially for essential goods, tends to be more stable even during economic downturns.