MC Review: HDFC MF’s new consumption-themed fund comes with a twist. Will it work?

HNCCF’s strategy would be to invest at least 80 percent of its corpus in stocks which represent the non-cyclical consumer theme.

HDFC Mutual Fund has launched a consumer fund, HDFC Non-Cyclical Consumer Fund (HNCCF), which intends to invest across consumption categories with a bottom-up stock selection while eliminating the cyclical sectors in the theme.

The new fund offer (NFO) period is from June 23 to July 7.

There are already 12 active funds with this theme in the market. To be sure, HNCCF would be the first active fund based on the consumption theme to be launched in India in over four years.

There are five exchange-traded funds (ETFs) as well, with the biggest being Nippon India ETF Nifty India Consumption and ICICI Prudential Nifty India Consumption ETF, with assets under management of Rs 40 crore each.

About the fund

HNCCF’s strategy would be to invest at least 80 percent of its corpus in stocks which represent the non-cyclical consumer theme within the basic industries such as Consumer Goods, Consumer Services, Telecom, Healthcare, Media, Entertainment and Publication.

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The idea behind excluding cyclical sectors is that the demand for non-cyclical consumer goods and services remains relatively stable across different phases of the economic cycle.

In HNCCF, sectors such as FMCG, consumer durables, consumer services and healthcare services are part of the theme. Automobiles, power and realty are relatively more cyclical and, hence, excluded.

The universe for this theme is diverse, with over 300 companies having a market cap of at least Rs 500 crore.

The benchmark to the scheme would be the Nifty India Consumption Index (TRI), and it would be managed by Amit Sinha, Fund Manager, Equity and Senior Equity Analyst, Dealing & Investments, who has over 15 years of experience in equity research.

Sinha, an engineer by qualification, joined the fund house in August 2020 as a senior equity research analyst, and was promoted as a fund manager in May 2023. HNCCF will be Sinha’s first scheme as a fund manager.

“We will focus on companies that have high market share or are gaining share on account of superior execution, scale, technology, etc. We aim to be equally focused on companies which are likely to witness steady and secular growth, along with companies likely to see a turnaround in profitability and have the potential of being re-rated,” said Sinha.

What works

Consumption is an evergreen theme in India, and the per-capita income in the country is expected to go up from $2,278 in financial year 2022 to $5,000 by FY32. Further, domestic private consumption contributes 59 percent to India’s Gross Domestic Product (GDP) and has grown faster than the nominal GDP in the last 10 years.

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According to the fund house data, in eight out of the last 12 financial years, the Nifty India Consumption Index has been among the top five sectors or themes. This was despite high inflation and rising interest-rate scenario.

Overall, the 12 active funds have delivered 30 percent returns on a yearly basis and 25 percent on a three-year basis.

The consumption sector is a well-diversified theme, which encompasses most other sectors of the Indian economy. To be precise, the 12 active funds have exposure in various degrees to 37 sectors of the Indian economy.

In terms of benchmark composition, the Nifty India Consumption Index has 37.32 percent exposure to Fast Moving Consumer Goods, Automobile and Auto Components (20.14 percent), Consumer Durables (16.52 percent), Telecommunication (9.96 percent) and Consumer Services (7.09 percent).

According to Sinha, non-cyclical consumer companies have relatively lower risk and volatility to business fundamentals. “With India’s consumption sector at an inflection point, this crosssection of India’s listed universe represents an opportunity to invest in growth with relative stability,” he added.

What doesn’t work

Consumption, as a theme, didn’t have smooth sailing in the recent past. In terms of performance, other sectoral funds, such as technology, infra, banks and auto, have put up a better show in a three- and five-year period.

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As mentioned earlier, as consumption is a well-diversified field, it is yet to be seen how excluding sectors like automobiles, power and realty will benefit the performance of HNCCF.

This is at a time when the auto sector is expected to move into higher gear, realty is gaining traction, and India’s power demand is seeing record highs.

Also, the benchmark to the HNCCF is the Nifty India Consumption Index. However, Nifty has a Non-Cyclical Consumer Index, which excludes sectors like auto, power and realty, and experts feel that it could have a better benchmark for the HDFC MF’s scheme.

According to Rushabh Desai, Founder, Rupee With Rushabh Investment Services, it is not clear whether non-cyclical will work better than the entire consumption theme.

“I would want the fund manager to have all the sectors at his/her disposal. If I'm taking a higher risk in the consumption theme, I would be comfortable going where the fund manager has the liberty to choose out of a wider universe,” Desai said.

Also, keep in mind to invest at reasonable/cheap valuations in the consumption theme, which makes timing your entry and exit very crucial.

What should investors do?

First of all, sectoral/thematic funds carry very high risk. Therefore, they are not suited for every investor’s risk profile.

“Sector or thematic funds fit investors with risk appetite. Post Covid, there has been a pent-up demand pickup in consumer discretionary. To that extent, this theme holds promise,” said Vidya Bala, Co-founder of PrimeInvestor.in.

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However, Bala suggests that investors looking at this theme should look at existing funds with a track record as the theme and universe of stocks are the same.

For most investors, taking exposure to a flexi-cap or a focussed fund would be a better bet because a fund manager would automatically add sectors doing well in the economy. Diversified funds eliminate the risk of a thematic or sectoral risk.

For investors taking exposure to consumer funds, an existing scheme with a proven track record and known portfolio construction would make better sense. Also, it is unclear how eliminating cyclical consumption themes would improve performance and reduce volatility in the fund.