India Consumption Story: Should Investors Bet on Consumption Funds?
India’s consumption economy continues to play a major role in overall growth, but the recent performance of consumption-focused mutual funds suggests investors may need to be selective rather than simply betting on the broader theme.
India’s GDP expanded 7.8% in the first quarter of FY27, comfortably above the Reserve Bank of India’s 7% projection. Consumption, investment and exports all contributed to growth, while capital expenditure also remained strong, rising 11.9%.
Despite the broader economic resilience, consumption-oriented funds have faced a difficult year. Among the top 10 consumption funds and ETFs ranked by their three-year performance, nine posted negative returns over the past year. Their three-year returns, however, remained positive and ranged between 11.5% and 15.46%.
This contrast raises an important question: does the recent correction create an opportunity for investors, or does it indicate that the consumption theme requires greater selectivity?
Consumption funds lag in the short term
Sonam Udasi, Senior Fund Manager at Tata Asset Management, said consumption-category returns have broadly tracked the Nifty 500 over the past year.
She noted that discretionary and lifestyle consumption segments are expanding faster, but valuations in these areas have also risen to reflect those expectations.
The Nifty 500 itself has delivered only modest gains over the past year, highlighting that the weakness in consumption funds has occurred against a relatively subdued broader market rather than in isolation.
Kranthi Bathini, Director of Research at WealthMills Securities, pointed to a structural change in the consumption landscape as one possible reason for the category's underperformance.
According to Bathini, consumption growth is increasingly coming from retail companies, domestic brands, regional businesses and organic brands, many of which are not listed on the stock exchanges.
The shift is visible in areas such as edible oils, where regional and cold-pressed brands are gaining traction but remain outside the listed universe. This gap between actual consumption trends and the companies represented in consumption funds could partly explain why the category has remained in consolidation.
Rural demand remains a concern
While some parts of the consumption economy are showing resilience, the near-term environment remains mixed.
Udasi said consumption linked to women-focused categories such as fast fashion, dining out and food delivery is performing well. However, inflation remains a potential short-term constraint on demand.
Higher raw-material costs and inadequate or weak rainfall could push inflation above 5% in the coming months, creating another challenge for consumption-sensitive businesses.
Bathini described consumption as being at an inflection point. While the monsoon and rural consumption have weighed on demand, automobile sales have provided a more positive signal.
Two-wheeler and four-wheeler volumes have remained strong, although the FMCG sector continues to go through a prolonged consolidation phase, with significant differences in performance between individual brands.
Is the recent correction an opportunity?
For investors considering consumption funds, the one-year decline may not tell the entire story.
The category's three-year performance remains relatively strong, with the leading funds and ETFs delivering returns between 11.5% and 15.46%. That suggests the recent weakness should be assessed alongside the longer-term performance rather than viewed independently.
Udasi said India's young population, expanding lifestyle aspirations and a growing listed consumption universe continue to create opportunities for investors.
She also pointed out that the Consumer Index has broadly tracked the Nifty 500 over the past decade, underlining the importance of consumption to the wider economy.
However, investors should distinguish between the broader consumption theme and individual funds or sub-segments. The listed universe may not fully capture emerging consumption trends, particularly where growth is being driven by smaller regional or unlisted brands.
What investors should consider
India's consumption story remains supported by economic growth, rising aspirations and a large domestic market. But that does not necessarily mean every consumption-focused fund or company will outperform.
The recent performance data suggests that investors need to examine valuations, portfolio composition and exposure to different consumption segments before making an investment decision.
The short-term weakness could offer opportunities if valuations become more reasonable, but factors such as inflation, rural demand, monsoon conditions and the changing competitive landscape remain important risks.
For investors with a longer horizon, the stronger three-year performance of consumption funds provides a more balanced perspective on the recent correction. The key, however, may be selectivity rather than simply investing in the consumption theme as a whole.
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