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What are Consumption Funds?

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Consumption funds are a way to invest in shares or stocks of companies that manufacture products consumed by the populace regularly. Imagine standing right at the front as India takes centre stage in the global financial scene! This includes companies that manufacture food, beverages, household products, clothes etc. 

Here we will delve deeper into everything you need to know about consumer funds and how they can be beneficial for investors. 

Understand the Meaning of Consumption Funds   

To put it simply, consumption funds allow traders to invest in consumption-oriented sectors.  Such sectors include Automobiles, FMCG (Fast-moving Consumer Goods), Telecom etc. These funds invest in companies that directly interact with customers. 

Undoubtedly and by extension, every sector in the country is consumption-oriented, but not all companies interact with the consumer directly. For example, the metals sector produces aluminium, steel, zinc, etc, but these are not directly bought by consumers. They are bought by companies that make them into products for consumers to use. The latter companies are the companies that come under consumption funds.  

Some of the major examples of companies listed on the stock market, that come under consumption funds include Hindustan Unilever, ITC, Nestle, Maruti Suzuki, Tata Motors, Bharti Airtel, SBI, HDFC Bank, Whirlpool, etc. These companies sell goods and services that come in direct contact with consumers daily. 

How Do Consumption Funds Work? 

Consumption funds are thematic funds that enable investments in stocks of companies focused on abiding by specific consumption themes. Consumption funds invest in consumer-facing companies i.e. companies that produce goods and services directly consumed by consumers. These companies can come under a wide range of consumption-oriented segments. This can include FMCG, automobiles, telecom, etc. 

When it comes to novice traders, however, mutual fund advisors always recommend that they should steer clear of investing in sector or thematic funds. It usually happens that such funds are usually quite volatile and risky, with the entire stock’s performance depending upon the demand for the specific theme in the market. Even for regular investors, consumption funds can make it difficult to figure out the entry and exit times. This is why investment in consumption funds should be left to seasoned and expert investors. 

Key Benefits of Investing in Consumption Funds    

Despite their volatility and inherent risk, consumption funds do have their fair share of benefits. Some of them are listed below:

Potential for Growth  

  • Consumer-centric companies usually offer high growth potential 

  • This is because they cater to a large population and face a high demand. 

  • Seeing as the GDP continues to rise along with the per capita income, consumption will always remain a strong theme. 

  • As a result, this will have a positive impact on consumption funds.

Longevity

  • The big consumption-oriented companies have been around for a long time despite any economic ups and downs 

  • Seeing this, there is no doubt that these companies are well-equipped to have a long runway ahead.

  • This ensures the longevity of the consumption funds

Returns

  • Consumption-oriented stocks like those of companies like ITC, HDFC Bank, HUL, etc have compounded wealth at 15% + since they started operating. 

  • As a result, consumption funds offer long-term returns to investors.

Types of Consumption Funds     

Factors to Consider Before Investing in Consumption Funds

Below are some of the main considerations to keep in mind before investing in consumption funds:

Assessing the Risk Profile

  • The concentration risk that comes with investing in consumption funds might be challenging for traditional investors

  • As a result, it is important to be ready to bear potentially high-risk investments 

Long-Term Commitment

  • To make consumption funds less risky, it is important to invest for at least 5 years or more

  • This should ideally also align with an investor’s long-term investment goals 

Less Diversification

  • While investing in consumption funds might help an investor diversify their portfolio, diversity within a fund itself is not present

  • The diversification of a consumption fund is focused on a specific sector. 

Conclusion 

Consumption funds enable traders to invest in consumption-oriented sectors. Such sectors include Automobiles, FMCG (Fast-moving Consumer Goods), Telecom etc. These funds invest in companies that directly interact with customers. With advantages and restrictions like any other equity, it is advised that only seasoned investors decide to invest in consumer funds and that new investors steer clear of it to avoid losses.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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Frequently Asked Questions

What is meant by the consumption fund?

Answer Field

To put it simply, consumption funds allow traders to invest in consumption-oriented sectors.  Such sectors include Automobiles, FMCG (Fast-moving Consumer Goods), Telecom etc. These funds invest in companies that directly interact with customers.

Is it good to invest in a consumption fund?

Answer Field

Since consumption funds hold potential for growth, offer longevity and higher returns, they can make for great investment options for seasoned traders

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