GST 2.0: Can consumption based thematic mutual funds ride the rally?

Prime Minister Narendra Modi has promised an overhaul of the goods and services tax (GST) regime in Independence Day speech, firing up the market that was trading more than a percent higher on August 18 morning.

The new GST structure, which the PM said would light up Diwali celebrations, is expected to slash rates across the board. The revised tax system will likely retain the 5 percent and 18 percent slabs and do away with the 12 percent and 28 percent rates.

The move is will give a boost to consumption-driven themes such as mass-market cars, two-wheelers, and FMCG companies. Health insurance premiums may also move from 18 percent to as low as zero.

However, “sin goods”, including luxury cars, might face a higher GST of 40 percent. This simplification isn’t just optics —it’s a catalytic step aimed at boosting consumption. Economists predict it could lift GDP growth by up to 0.6 percentage points and energise sentiment across autos, FMCG, banks, and other consumption-linked sectors.

What it means for thematic fund investors

With consumers likely to spend more, these sectors may outperform, potentially lifting thematic fund performance.

“The proposed cut in GST rates, if implemented, is likely to lead to an aggressive consumption wave. Hence, sectors like auto, FMCG, and discretionary may see positive earnings for the companies in these sectors. In the short to medium term, thematic or sectoral consumption sector-oriented funds may become an attractive proposition, albeit with a higher risk attached due to the concentration of investments along a single theme,” said Rajesh Minocha, CFP, Founder – Financial Radiance.

For the automobile sector, the government is reportedly considering lowering GST on passenger vehicles (PVs) and two-wheelers, making them more affordable.

At present, all PVs attract a GST of 28 percent. Additionally, a compensation cess ranging from 1 percent to 22 percent—depending on engine capacity, length, and body type—can push the total tax payable as high as 50 percent. In contrast, electric cars are taxed at just 5 percent with no cess.

“Staples like butter, ghee, noodles, and snacks may become cheaper. Lower prices are likely to boost demand and volumes for companies like Nestlé, HUL, Bikaji, and Gopal Snacks. Analysts see stronger consumer sentiment in this space,”  said Viral Bhatt, Founder, Money Mantra.

Items such as air conditioners and large TVs could also see GST reduced from 28 percent to 18 percent, translating into 8–10 percent price cuts. This can drive pent-up demand, especially during the festive season, Bhatt said.

In his Independence Day address, Modi said, “This Diwali, I am going to make it a double Diwali for you. You, my fellow countrymen, are going to get a very big gift. In the last eight years, we have carried out a big GST reform, reduced the tax burden, simplified the regime, and now, after eight years, the time has come to review it again. We started with a high-power committee and have also held discussions with the states.”

Smart, not hasty

GST rationalisation could be a spark for consumer demand. Thematic mutual funds focused on autos, FMCG, and consumption stand to benefit but investors should balance optimism with prudence. Allocating 5–10 percent to consumption-based thematic funds makes sense but sector concentration means higher volatility.

However, the majority of investors should consider diversified equity funds like flexi-cap funds to be a safer option for long-term wealth creation, Minocha said.

“The thematic funds can therefore be explored on a limited basis under a satellite portfolio, with an allocation of 5-10 percent for those who can afford to take on more risk,” he said. It is important that investors don’t chase short-term trends but invest by aligning their financial goals, time horizon for investments and risk appetite.

For investors, the proposed GST cut is a clear consumption play. Auto, FMCG, consumer durables, and insurance are sectors likely to benefit, and mutual funds with exposure here could see upside.

Dedicated consumption and sectoral funds or diversified products like the Nifty India Consumption Index offer a way to participate in this growth.

“These reforms could trigger a structural boost in demand and corporate earnings. But instead of going all-in on one sector, a diversified consumption or multi-sectoral fund may provide a balanced way to ride the GST-driven growth story,” Bhatt said.