Mutual funds new thematic funds based on services and consumption themes could do well, given India’s large domestic consumption driven market. Allocate maximum of 10-20% of money and use the systematic investment route (SIP).   

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Fund houses such as Sundaram and BNP Paribas have come out with new offerings that bet on consumption (BNP Paribas India Consumption Fund) and services (Sundaram Services Fund). Additionally, existing open-ended funds like SBI Consumption Opportunities Fund (erstwhile SBI FMCG), Reliance Consumption Fund (erstwhile Reliance Media & Entertainment) and a whole host of financial and banking services schemes are available if you want to invest in tried-and-tested funds.

India is a large domestic consumption driven market, where services account for over 50% of GDP. So, themes that use the word ‘consumption’ and ‘services’ automatically catch attention. DNA Money spoke with experts to understand what should be the approach to such themes. 

What drives these sectors
There is little surprise that consumption and services are buzzwords for MF managers. The domestic strength of the economy, including purchasing power of the urban and the rural populace, lends support to the consumption theme. Large FMCG companies, lifestyle companies, paints, electrical appliances, etc, are part of this trend. On the services front, there are retail banks, asset management firms, insurance, healthcare services & fitness, trade, tourism & hospitality, transportation business services, media, entertainment & gaming, telecom/data providers.

While consumption theme rests on both products and services, the services theme is betting on the fact that services companies will grow faster given the opportunity for expansion.

Historical performance
Historical performance does show that existing consumption and services themes have done pretty well. SBI Consumption Opportunities Fund has gained 20% annually in last five years (turning Rs 1 lakh into Rs 2.5 lakh). In the same period, Sundaram Rural and Consumption Fund has clocked nearly 26%, Aditya Birla Sun Life India GenNext Fund gained 25%, UTI Lifestyle Fund 18% and Reliance Consumption Fund 17%.

Market experts are quite bullish about consumption. “We hosted consumer centric companies in PL Consumption Series I. The companies catered to diverse segments like branded apparel, luggage, FMCG packaging, switchgear and cables, kitchenware, glassware and radio. Our interactions suggested that consumption demand is improving as economy is showing signs of uptick. Companies are gearing up to cater to this upsurge. The fulcrum of growth is shifting towards Tier II and III towns and rural India. Corporate India seems confident of near term growth, however, how far and how long this journey will continue is a guessing game, given that small towns and rural India is approximately two-thirds of population, but less than 30% of demand,” said Amnish Aggarwal, head - research, Prabhudas Lilladher.

On the services front, banking and financial services funds on an average have made MF investors richer by 22.9% annually, in half a decade’s time. Services theme consists of different sectors. “Irrespective of what the theme mandate of the fund is, usually there would be a number of sectors woven around a particular theme. We advise clients to buy thematic funds, because they are more diversified than a sector fund. For example, an IT/technology fund can invest only in IT firms. A thematic fund has a much broader canvas,” pointed out Ritesh Varma, a MF advisor who has a clientele comprising ITes and BPO executives.  

Thematic funds are also more long term. For instance, financialisation of assets, that is, shift in investment pattern in favour of financial assets, from property and gold, is not going to stop anytime soon.

“Services firms require lesser capital (compared to companies that set up factories), hence, there is lower risk of debt problems. Establishing a brand is tougher. If you want to build a portfolio of stocks, it will be tougher. Hence, most retail investors must play these themes through funds. Keep investments in all thematic funds limited to 10-20% of your overall equity exposure. This is for downside protection. Sometimes, themes do not work as well as you want. If 10% of your money in such a theme, you will not get impatient,” argued Ramesh Krishnan, a former banker who now runs a boutique financial advisory firm.

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Be patient, use SIP
Do not expect a thematic fund to start performing from day one. One should be prepared to give at least five years time, with regular reviews annually, to thematic funds. Since the market valuation is not exactly cheap anymore, there are chances of intermittent corrections. While consumption and services themes are linked to domestic economy, economic phases and global downturns can affect the export-driven companies as well.

“The timing of the entry and the exit of a thematic fund becomes crucial. It is better to use the Systematic Investment Plan (SIP) route. While thematic funds may be much more diversified, using the SIP method will spread the money over a large period. Also, SIP returns are usually higher than lumpsum investments,” said Anil Rego, CEO, Right Horizons.

For investors who understand the themes
Thematic funds are ideal for investors who are convinced about a theme, but are unable to decide which stocks to invest in. These would typically be seasoned investors, who have domain knowledge regarding a theme. The same themes may be captured through other existing schemes, although on a limited scale and scope. New investors with one to three years of MF experience, should choose diversified funds, with a large cap bias and multi-cap funds. They can avoid thematic funds.

Source: DNA Money