Will the latest plan that places its money on non-cyclical consumer sectors succeed? A review of Moneycontrol

Will the latest plan that places its money on non-cyclical consumer sectors succeed? A review of Moneycontrol

It would make more sense for investors who want to access consumer money to choose an established program with a track record of success. It is also unclear whether eliminating cyclical consumption themes will improve performance and reduce volatility.

Based on the consumption concept, there are now over 20 active and passive schemes available.

The first non-cyclical index fund in India, introduced by Groww Mutual Fund, aims to invest in equities that reflect the non-cyclical consumer theme. Top businesses from industries like consumer goods, consumer services, telecom, media and entertainment, publishing, textiles, and more will be the focus of this passive thematic fund.

What's being offered?

Based on the consumption concept, there are now over 20 active and passive schemes available. The Groww Nifty Non-Cyclical Consumer Index Fund seeks to invest in non-cyclical businesses that manufacture necessities whose market demand is steady throughout the economic cycle.

Contrarily, cyclical businesses manufacture items that, in times of economic expansion, may experience a significant rise in demand, and in times of contraction, the reverse may occur.

This passive theme fund will contain a portfolio of thirty firms chosen from the Nifty 500, with a concentration on seven non-cyclical industries.

According to the most recent portfolio construction, its top holdings by weight are Asian Paints (6.40 percent), Titan Company (7.39 percent), Hindustan Unilever (9.48 percent), ITC (9.75 percent), and Bharti Airtel (10.26 percent).

When it comes to sectoral representation, fast-moving consumer goods, or FMCG, has the biggest weightage (41.98 percent). Consumer services, consumer durables, telecommunications, and services are the next highest weightages (22.16 percent, 22.07 percent, and 2.81 percent, respectively).

The allocation of the Nifty Non-Cyclical Consumer Index Fund is 88.35 percent to large-cap stocks, 11.21 percent to mid-cap companies, and very little to small-cap stocks.

What functions?

Empirical evidence indicates that declines in discretionary expenditure have an effect on a number of industries, including luxury products, banks, airlines, and autos. The Nifty Non-Cyclical Consumer Index does not include these industries.

The FMCG, consumer services, telecommunications, textiles, media and entertainment, utilities, and services are the main industries that make up the non-discretionary group.

In times of recession, these industries tend to stand out because to the persistent demand from customers for the products and services they provide. These are thus classified as non-cyclical industries.

The index firms are fundamentally anticipated to have reduced volatility and drawdowns. The non-discretionary sectors are the focus of the Groww Nifty Non-Cyclical Consumer Index Fund. When there is market volatility, there are two major spending categories: discretionary and non-discretionary. Discretionary expenditure might be more volatile than non-discretionary consumption, according to Groww Mutual Fund CEO Varun Gupta.

Research indicates that the Nifty Non-Cyclical Index often performs better than the Nifty 50 Index during market dips.

"There is volatility and the markets are at an all-time high." Retail investors should take advantage of this opportunity to invest in funds that have historically had lower drawdowns than the market as a whole and have the ability to provide long-term returns while controlling volatility, according to Gupta.

Furthermore, the non-cyclical index's current price-to-earnings (P/E) ratio is less valuable than both its five- and 10-year averages. Thus, it can be concluded that the index has a favorable value.

What is ineffective?

Sectoral or theme funds have a very high risk, to start. As a result, not every investor's risk profile is appropriate for them.

Furthermore, the first passive scheme to investigate the non-cyclical sectors within the broader consumption topic is the Groww Nifty Non-Cyclical Consumer Index Fund.

Regarding the stock basket, this sub-theme is still relatively young, and its future performance is unknown. Indeed, HDFC Mutual Fund established an active HDFC Non-Cyclical Consumer Fund in July 2023.

Research indicates that investing in the non-cyclical consumer theme may not be all that beneficial in the long run.

For instance, until April 30, the Nifty Non-Cyclical Consumer Total Returns Index (TRI) increased by 36.70 and 18.50 percent, respectively, during a one-year and five-year period. In contrast, during the same time periods, the Nifty India Consumption TRI has returned 39.82 and 18.02 percent.

Rushabh Desai, the founder of Rupee With Rushabh Investment Services, said that diversified funds, like flexicap funds, are a better option for retail investors since they have significant sectoral rotation in addition to largecap tilt in non-cyclical consumer funds.

How should investors proceed?

India's per capita income is predicted to increase from $2,278 in FY22 to over $5,000 by FY32, which would fuel robust growth in all areas of consumption.

Consequently, it would make more sense for investors looking to access consumer money to choose an established program with a track record of success. It is also unclear whether eliminating cyclical consumption themes will improve performance and reduce volatility.

On May 16, the Groww Nifty Non-Cyclical Index fund's new fund offer will end.