Mumbai: Investors with an appetite for risk and looking to add a thematic bet to their equity mutual fund portfolio can consider the consumption theme. Lower future inflation, higher incomes paced by IT jobs, rapid urbanisation and premiumisation are likely to drive domestic consumption in the coming years, presenting a good entry point to investors with a two-year time frame.
In the past year, the Nifty India Consumption Index has gained 16.9%, as compared with the Nifty50 gain of 7.49%. In the same period, the price-to-earnings (PE) ratio fell from 78.64 to 39.7, with companies reporting better profitability as the economy opened up after Covid-19.
Rising inflation, a big worry for consumption, is on the backseat with commodities cooling off and oil prices coming off their highs. Retail inflation stood at 7.01% in June, down from 7.04% in May and 7.79% in April.
“A decline in inflation would give a boost to consumption. Lower inflation will fuel discretionary expenditure, help the volumes and will keep growth and sentiments positive,” said Sahil Kapoor, market strategist at DSP Mutual Fund.
Corporate margins are on the rise, as many have not lowered prices to the end consumer. “Despite commodity prices cooling off, we are seeing many companies not passing on the benefit to end-consumers, which shows margins are on the rise,” said Rupesh Bhansali, head-distribution at GEPL Capital.
As per a report by the World Economic Forum, India has a young population with a likely median age of 30 even in 2030. That will compare with 37 for China, and 32 years for the rest of the world.
India will be among the few countries expected to enjoy a higher working population and lower dependent population for the next three decades. The ratio of India’s dependent population to working-age population size is set to fall further, implying rising income households, an essential consumption driver. The share of women in the IT workforce is on the rise, which would have a double positive effect on household income, discretionary consumption and savings.
“When disposable income increases, households have more money to either save or spend, which naturally leads to a growth in consumption. Over 500 million people crossing the $2,000 per capita income mark is expected to drive a whole new cycle in discretionary and non-discretionary consumption in India,” said S Naren, chief investment officer at
Naren believes investors can consider this theme as it consists of relatively defensive segments such as FMCG, pharma & healthcare, telecom, and auto and the risk is relatively lower than individually investing in any of these sectors.
However, given that it is a thematic bet, investors should restrict allocation. Savvy investors can use passive consumption ETFs, while others who want the fund manager to monitor a portfolio can opt for actively managed funds. “Restrict exposure to 5-10% of your portfolio,” said Bhansali. He recommends ICICI Prudential Bharat Consumption Fund and