Should you invest in consumption-focused mutual funds right now?
What's the story
India's economy is heavily driven by consumption, with the country's GDP growing 7.8% in Q1 FY27, surpassing the RBI's projection of 7%. However, despite this growth, investors in consumption-focused mutual funds have had little to cheer about over the past year. Most of the top 10 consumption funds and ETFs ranked by three-year returns have delivered negative one-year returns.
Analysis
Opportunity or need for selectivity?
The divergence between one-year and three-year returns raises an important question for investors.
Is the recent weakness an opportunity to enter the consumption theme at more reasonable valuations, or does it signal that they need to be more selective?
Sonam Udasi, Senior Fund Manager at Tata Asset Management, said, "The Consumption category's returns are mirroring the broader Nifty 500 performance over the last one year."
Market shift
Changing consumption landscape
Kranthi Bathini, Director of Research at WealthMills Securities, said, "A key reason for the underperformance of consumption funds in the short to medium term could be the changing consumption landscape."
He added that retail companies, home-grown brands, regional players and organic brands are increasingly driving consumption. Many of these are still unlisted.
Bathini also noted that higher raw material prices and poor/insufficient rainfall could push inflation above 5% in the coming months.
Outlook
Optimism in auto sales, women-related consumption
Despite short-term challenges, Udasi remains optimistic about consumption trends in India. He said, "Women-related consumption is doing well - fast fashion, dining out, ordering in etc."
Bathini also highlighted that auto sales are presenting a more encouraging picture with two-wheeler and four-wheeler volumes remaining strong.
However, he noted that the FMCG sector has been in a prolonged phase of consolidation with significant divergence among individual brands.
Investment strategy
Long-term view on consumption theme
For investors, it's important to view the recent one-year correction alongside the stronger three-year performance.
The data suggests that while returns can vary sharply across funds and segments, the consumption theme has delivered over the long term.
Udasi emphasized that "we are a young nation of large population, with growing lifestyle aspirations," adding that "the listed consumption universe is robust and growing."