India’s rapidly expanding middle class is fuelling stronger consumption patterns, shaping demand across industries such as retail, healthcare, automobiles, and digital services.*
This shift has contributed to the rise of thematic funds like consumption funds, which invest in companies that may benefit from this growing consumer demand. While these funds carry their own set of risks, understanding how they work in the context of India’s demographic trends may help investors make more informed decisions when evaluating opportunities.
*Source: How India’s Middle Class is Shaping Tomorrow by Rediffusion Consumer Lab
What are consumption funds?
As the name suggests, consumption funds are a type of thematic mutual fund that invest in companies expected to benefit from rising consumer spending. SEBI classifies sectoral/thematic funds and requires such funds to invest at least 80% in stocks of the sector/theme. These may include businesses in consumer goods, entertainment, food and beverages, e-commerce, and financial services.
Unlike diversified funds, consumption funds concentrate on specific consumption-driven sectors. This focused approach means their performance is closely linked to consumer demand. When spending patterns are strong, these funds may benefit; however, during periods of weak consumer sentiment, their performance may be adversely impacted.
The growth of India’s middle class
Over the past two decades, India’s middle class has expanded significantly. Rising incomes, easier access to credit, and growing aspirations have pushed a large section of the population into consumption-driven income brackets. At the same time, some recent reports note near-term headwinds in consumer spending, underlining that structural trends can coexist with short-term volatility.
This trend points to higher spending capacity on discretionary items such as branded goods, automobiles, travel, and financial services. As demand for these categories increases, companies serving these needs may benefit, something that may also be reflected in the performance of consumption-focused stocks.
How consumption funds may benefit
By investing in consumption funds, investors gain exposure to businesses directly influenced by rising consumer demand. For example, FMCG companies may benefit from both urban and rural consumption growth, while retail and e-commerce players capture spending from younger, digitally connected households.
However, it is important to note that these funds may not always move in line with the broader market. Owing to their thematic focus, they may underperform during phases when other sectors, such as IT or energy, are driving overall market growth.
Please note: Reference to any industry/sector/stock is provided for illustrative purposes only. This should not be construed as a research report or a recommendation to buy or sell any security or sector.
Comparing with an index fund
An index fund primarily invests in a market index such as the Nifty 50 or Sensex, offering exposure to large-cap companies across multiple sectors. Unlike consumption funds, index funds are not tied to a single theme and provide broader diversification. Index funds aim to replicate an index’s returns, subject to tracking error and fund expenses.
For investors, index funds can serve as a relatively cost-effective way to diversify and participate in overall market movement. In contrast, consumption funds may appeal to those seeking thematic exposure to long-term structural trends, such as the expansion of India’s middle class. Some investors may choose to hold both, using index funds as the core of their portfolio for diversification, while adding consumption funds as a thematic allocation.
Factors to consider before investing
While the growth of the middle class is a structural theme, investors need to remember a few points before considering consumption funds:
• Concentration risk: Since these funds invest heavily in a few sectors, they may experience higher volatility.
• Market cycles: Consumer demand may be cyclical, rising during strong economic periods and slowing during downturns.
• Investment horizon: Thematic funds generally require a longer horizon, as short-term fluctuations can affect performance.
• Portfolio balance: Aligning a consumption fund with other diversified investments, such as an index fund, can provide balance.
Using a compound interest calculator for planning
When planning investments in thematic funds, it helps to visualise how regular contributions may grow over time. A compound interest calculator enables investors to estimate the potential accumulation of their investments by factoring in reinvested returns.
By adjusting inputs such as contribution amount, assumed returns (not guaranteed), and investment duration, investors can get an illustrative view of how long-term investing may potentially impact their portfolio. This makes the tool particularly useful when evaluating allocations to thematic categories like consumption funds. The calculator is an aid, not a prediction tool. It may provide only an indicative picture.
Conclusion
The rising middle class of India showcases a trend that can potentially benefit businesses driven by consumer spending. Consumption funds provide exposure to this theme by investing in companies across sectors such as retail, FMCG, and financial services. At the same time, investors should remember that these funds are concentrated and may be relatively volatile compared to diversified options.
Comparing them with an index fund highlights the importance of diversification, as index funds spread investments across the market. Using tools like a compound interest calculator can also support decision-making by showing the potential long-term impact of investments. Ultimately, investors may consider consumption funds as part of a broader portfolio strategy, keeping their goals, horizon, and risk appetite in mind.
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.
