India’s Spending Revolution: Why Consumption Funds Deserve Attention

India’s consumption story is one of the most powerful themes driving its long-term growth narrative. As disposable incomes rise, urbanisation deepens, and aspirations expand, consumer spending across categories from food, beverages, and personal care to automobiles and discretionary goods continues to surge. Mutual Funds that tap into this theme, known as ‘consumption funds’, are increasingly drawing investor attention, thanks to their ability to capture India’s domestic demand potential.

What is a Consumption Fund?

A consumption fund is a thematic equity mutual fund that primarily invests in companies benefiting from India’s growing consumer demand. These funds typically allocate capital to sectors such as fast-moving consumer goods (FMCG), retail, automobiles, consumer durables, hotels, airlines, and healthcare. The idea is to build a portfolio of businesses that thrive on increased spending by individuals and households.

They tend to include large and well-established brands that have pricing power, strong distribution networks, and consistent cash flows. The portfolios are typically dominated by companies such as Hindustan Unilever, ITC, Titan, Nestle India, Maruti Suzuki, Asian Paints, and Avenue Supermarts (DMart).

Some of the prominent schemes include Tata India Consumer Fund, Mirae Asset Great Consumer Fund, Nippon India Consumption Fund, and ICICI Prudential Bharat Consumption Fund, all of which have delivered average annual returns of around 18-20 per cent to investors.

Why Consumption Funds are Gaining Traction

1. Government push to boost consumption

The government’s policy thrust on increasing disposable incomes through Tax reliefs and welfare schemes is expected to strengthen consumption demand. Initiatives like PM Kisan, rural infrastructure spending, and the widening of the tax-free threshold under the new tax regime have put more money in people’s hands.

2. Interest rate cuts supporting demand

With inflation easing, the Reserve Bank of India has significantly reduced the repo rate since the beginning of the year. Rate cuts improve affordability, particularly for high-value purchases like vehicles and consumer durables, providing a direct boost to companies in the consumption space.

3. GST reforms and formalisation

The recent reduction in Goods and Services Tax (GST) rates on select consumer goods and services has provided a fresh boost to consumption. By lowering the tax burden on items such as household appliances, packaged foods, and certain lifestyle products, the move has enhanced affordability and encouraged higher spending. This step aligns with the government’s broader objective of stimulating demand and supporting industries that cater to mass and discretionary consumption.

4. Rising aspirations and urbanisation

India’s demographic profile continues to be a strong tailwind. With over 65 per cent of the population below 35 years, increasing urbanisation, and rapid digital adoption, consumer habits are evolving. Spending on lifestyle, travel, and convenience categories is rising sharply, broadening the scope for consumption-led growth.

5. A shield against global volatility

The domestic demand theme acts as a natural hedge against global uncertainties. Even when global growth slows, India’s internal consumption tends to provide stability, making this theme a relatively defensive play in volatile markets.

The Flip Side: Risks to Watch Out For

Since these businesses cater to basic and discretionary needs, they often show resilience during economic downturns. However, being thematic in nature, these funds carry higher sectoral concentration risk compared to diversified Equity Funds.

Unlike diversified equity funds that spread investments across sectors, consumption funds are concentrated around the consumption theme, making them more sensitive to changes in consumer sentiment, income levels, and macroeconomic trends.

They are ideal for investors with a medium to long-term horizon who can withstand short-term volatility. Therefore, it is advisable to limit allocation to such thematic funds to around 10-15 per cent of one’s equity portfolio and hold them with a long-term perspective.

Outlook

India’s journey toward becoming a USD 5 trillion economy will be strongly driven by domestic consumption, which already contributes nearly 60 per cent to the nation’s GDP. The steady rise in household incomes, a growing middle class, and supportive government policies are creating a favourable environment for sustained consumer demand. Additionally, rural markets are witnessing renewed momentum backed by higher agricultural income, improved infrastructure, and welfare initiatives. These factors collectively reinforce the long-term strength of India’s consumption story.

For investors looking to capture this structural trend, consumption funds provide an attractive gateway to participate in sectors that stand to benefit from the country’s expanding spending power, offering both growth potential and portfolio diversification over the long term.

However, like every coin has two sides, investors should also be mindful of the risks associated with such funds. Investors must assess whether their risk appetite, investment horizon, and financial goals align with the fund’s profile before investing.

With a cautious approach and a long-term investment horizon, consumption funds can indeed be a good investment bet!

Disclaimer: The funds mentioned above are for informational purposes only and should not be considered as investment advice.