How consumption funds benefit from rising consumer demand

In a healthy economy, rising consumer demand leads people to buy more goods and services. This, in turn, helps business grow and boosts the economy as a whole. By investing in companies and sectors that stand to benefit from rising consumption, investors can potentially benefit from growing demand and consumer spends.

A consumption fund provides such an investment avenue. This is a type of thematic mutual fund focuses on companies and industries directly tied to consumer spending, which could include fashion, textiles, tourism, food and beverage, electronics, automobiles, household products and more.

When people buy more products, these sectors prosper, resulting in long-term growth potential for investors.

In this article, we’ll take a closer look at how consumption funds benefit from rising consumer demand. We’ll also explore key consumer industries and how investors can tap into this opportunity through thematic mutual funds.

• Table of contents

1. Consumption and economic growth
2. Sectors that drive consumption boom
3. Consumption funds: Tapping into an opportunity

Consumption and economic growth

Let’s begin by understanding how consumption affects the economy. Consumption, in economic terms, is the use of goods and services by households. These can include essential expenses (such as groceries) as well as discretionary spends, such as fashion, electronics, luxury experiences and more. As economies grow and per-capital incomes rise, consumption typically increases. When more people buy products like groceries, clothing, and electronics, it boosts sales for businesses. These businesses then grow, creating more jobs, contributing to the gross domestic product and paying more taxes, which leads to overall economic growth

Rising consumer demand can be a strong sign of a growing economy. On the other hand, when consumer spending slows down, businesses often face challenges, and the economy may struggle. This shows how closely linked consumption and economic growth are. As an investor, understanding this connection can help you identify suitable investment avenues that offer long-term growth potential.

Sectors that drive consumption boom

There are several industries that can benefit from rising consumer demand. Here are some key sectors and industries within the ambit of consumption:

1. Retail and e-commerce: The retail industry is perhaps the most direct example of how consumer demand drives growth. When people buy products in stores or online, retail companies see an increase in sales. This growth is even more significant with the rise of e-commerce, where buying online has become more convenient.
2. FMCG (Fast-Moving Consumer Goods): FMCG companies sell everyday products like food, beverages, toiletries, and cleaning supplies. FMCG includes essential goods such as everyday household items and food supplies, which means that they have some demand even during slowdowns, making them relatively resilient.
3. Automobile industry: With growing urbanisation, improving connectivity and infrastructure and rising per-capita incomes, the demand for vehicles rises. This leads to growth in the automobile sector, including cars, motorcycles, and, more recently, electric vehicles (EVs).
4. Consumer durables: Consumer durables include products like refrigerators, washing machines, and air conditioners. As more people earn higher incomes, they invest in such items. Demand for these durable goods rises when people have the money to spend on big-ticket items.
5. Travel and hospitality: As incomes rise and people look for new experiences, the travel and hospitality industry can see a significant boost. This sector includes airlines, hotels, resorts, and restaurants. Whether it's a holiday or a business trip, increased spending on travel and leisure leads to growth in these companies. After a period of slower activity due to global challenges, travel and hospitality are roaring again, making them a key part of the consumer-driven growth story.
6. Food and beverage: This sector is comprised of companies involved in the production, distribution, and sale of food items, beverages, and packaged goods. Some of these may be essential goods, which can be an all-weather investment. Others include discretionary spends and experiences, linked to higher standards of living. This includes the restaurant business.
7. Entertainment and media: Increasing consumer demand in the entertainment and media sector is driven by the growing appetite for digital content, streaming services, and immersive experiences. As people spend more on movies, music, gaming, and online media, companies in this space innovate and expand offerings, leading to revenue growth and industry expansion.

Tapping into the opportunity with consumption funds

Now that we understand which industries benefit from rising consumer demand, the next question is: how can an investor tap into this opportunity? This is where consumption funds come into play. Consumption funds benefit by investing in companies that directly or indirectly serve consumer needs. These mutual funds focus on industries tied to regular consumption habits. As consumer demand grows, the companies within these funds grow, and investors can earn potential returns from their investments.

The following are some of the advantages of investing in consumption funds:

• Exposure to varied sectors: Consumption funds invest in a wide range of industries such as retail, FMCG, and healthcare. This diversification reduces risk, as different sectors may perform well under various market conditions. For example, even if retail sees a slight slowdown, healthcare might still grow, balancing your investments.
• Economic link: As mentioned earlier, consumption is directly tied to economic growth. Therefore, consumption funds have the potential to perform better when the economy is growing. As people spend more on goods and services, the companies in these funds benefit, and so do the investors.
• Ease of investing: If you want exposure to industries like retail or healthcare but aren’t sure which companies to invest in, consumption funds offer a simple solution. These funds are managed by investment professionals who select companies based on their growth potential, so you don’t have to go in-depth to pick the right stocks.
• Long-term growth potential: Some sectors, like healthcare and e-commerce, have long-term growth potential. As more people go online to shop or require medical care, these industries are expected to grow steadily. Consumption funds give you access to these sectors, helping you benefit from these long-term trends.

However, it is important to note that thematic funds can entail higher risk than equity funds that invest across sectors due to their concentrated focus on a smaller range of industries. There is also the risk of potential underperformance if the chosen theme falls out of favour or fails to deliver expected growth.

Conclusion

Consumption funds benefit from rising consumer demand by investing in industries that are closely linked to everyday spending. As people buy more goods and services, the companies that provide them grow, which in turn boosts the value of these funds. Consumption funds can be a suitable investment opportunity for those who want to potentially benefit from economic growth and rising consumer demand.

At a time when India is poised for significant growth, with rising per-capita incomes, industries such as retail, FMCG, healthcare, and automobiles can offer compelling investment opportunities with long-term growth potential. Investing in a consumption fund can help investors tap into the growth potential of these sectors’ through a professionally managed portfolio, without having to identify individual companies that offer growth prospects.

FAQs

What are consumption funds?

Consumption funds are mutual funds that invest in companies linked to consumer spending, such as retail, healthcare, FMCG, and automobiles.

What is a thematic mutual fund?

A thematic mutual fund focuses on a specific theme or certain sectors. Consumption funds are an example of a thematic mutual fund, as they target industries related to consumer demand.

How do consumption funds benefit from rising consumer demand?

As consumer demand increases, the related sectors witness growth, which can potentially result in returns for funds investing in companies that are doing well in these sectors.

What industries do consumption funds invest in?

Consumption funds typically invest in sectors like retail, FMCG, healthcare, travel and hospitality, automobiles, and consumer durables, all of which are tied to consumer demand.

Is it safe to invest in consumption funds?

While consumption funds offer growth opportunities, they also come with market risks. In particular, thematic funds face concentration risk because all investments are centred on a narrow group of sectors. Diversifying your investments and consulting with a financial expert are advisable.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.