Will a new scheme that bets on non-cyclical consumer sectors pay off? A Moneycontrol review

There are more than 20 schemes, active and passive, currently on offer based on the consumption theme.

Groww Mutual Fund has launched India's first non-cyclical index fund that proposes to invest in stocks that represent the non-cyclical consumer theme. This passive thematic fund will focus on top companies from sectors such as consumer goods, consumer services, telecom, services, media and   entertainment, publication, and textiles, among others.

What’s on offer?

There are more than 20 schemes, active and passive, currently on offer based on the consumption theme. Groww Nifty Non-Cyclical Consumer Index Fund will look to bet on non-cyclical companies that produce essential goods whose demand remains stable across different phases of the economic cycle.

Cyclical companies, on the other hand,  produce goods which can see a relatively large increase in demand during economic upswings, and the opposite during downswings.

This passive thematic fund will focus on seven non-cyclical sectors and have a portfolio of 30 companies selected from the universe of Nifty 500.

As per the latest portfolio construct, its top constituents by weightage include Bharti Airtel (10.26 percent), ITC (9.75 percent), Hindustan Unilever (9.48 percent), Titan Company (7.39 percent), and Asian Paints (6.40 percent).

In terms of sectoral representation, fast moving consumer goods — FMCG — has the highest weightage (41.98 percent), followed by consumer services (22.16 percent), consumer durables (20.07 percent), telecommunications (11.26 percent), and services (2.81 percent).

The Nifty Non-Cyclical Consumer Index Fund has 88.35 percent allocation to largecaps, 11.21 percent to midcaps, and negligible allocation to smallcap stocks.

What works?

Data shows that when discretionary spending reduces in the economy, it impacts sectors such as automobiles, airlines, banking and hospitality, luxury goods, etc. These sectors are absent in the Nifty Non-Cyclical Consumer Index.

The key sectors comprising the non-discretionary category are FMCG, consumer services, telecommunications, services, textiles, media and entertainment, utilities, etc.

Because of the continued demand from consumers for goods / services related to these sectors, they tend to stand out during a slowdown. Hence, these are categorised as non-cyclical sectors.

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“Fundamentally, the companies in the index are expected to have lesser volatility and drawdowns. Groww Nifty Non-Cyclical Consumer Index Fund focusses on sectors that are non-discretionary in nature. Between the two broad consumption categories -- discretionary and non-discretionary -- whenever there is volatility in the market, the discretionary ones can be more volatile than non-discretionary ones,” said Varun Gupta, Chief Executive Officer, Groww Mutual Fund.

Data shows that during market corrections, the Nifty Non-Cyclical Index tends to outperform the Nifty 50 Index.

“Markets are at an all time high, and there is volatility. This is the right time for retail investors to invest in funds where, historically, drawdowns have been controlled versus the overall market, and there is a potential to generate long term returns while controlling volatility,” said Gupta.

Further, in terms of valuation, the current price-to-earnings (P/E) ratio of the non-cyclical index is below its five and 10-year averages. It may thus be inferred that the index is valued favourably.

What doesn’t work?

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

Further, the Groww Nifty Non-Cyclical Consumer Index Fund is the first passive scheme to explore the non-cyclical sectors from the overall consumption theme.

This sub-theme, in terms of the basket of stocks, is still very new and it is not known how it would perform in future. To be sure, In July 2023, HDFC Mutual Fund had launched an active HDFC Non-Cyclical Consumer Fund.

Data shows that on a long-term basis, investing in the non-cyclical consumer theme might not be that much more advantageous.

For example, the Nifty Non-Cyclical Consumer Total Returns Index (TRI) gained 36.70 and 18.50 percent on a one-year and five-year basis, respectively, till April 30. Whereas, the Nifty India Consumption TRI has returned 39.82 and 18.02 percent  over the same periods.

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“Diversified funds such as flexicap funds are a better bet for retail investors, because even though a non-cyclical consumer fund may have a largecap bias, there is decent sectoral rotation in diversified funds as well,” said Rushabh Desai, Founder, Rupee With Rushabh Investment Services.

What should investors do?

India’s per capita income is expected to go up from $2,278 in FY22 to more than $5,000 by FY32, and this is expected to drive strong consumption growth across categories.

Therefore, investors aiming to tap into consumer funds would find it more sensible to opt for an established scheme with a proven track record. Further, whether excluding cyclical consumption themes would enhance performance and minimise volatility remains uncertain.

The new fund offer for the Groww Nifty Non-Cyclical Index fund will close on May 16.

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