NFO Review: Should investors be interested to invest in the HDFC Non-cyclical Consumer Fund?

Fund managers are getting more creative with their recent fund releases. Take, for example, HDFC Mutual Fund recently launched the HDFC Non-Cyclical Consumer Fund that aims to generate long-term capital appreciation by investing predominantly in equity and equity-related securities of companies with a focus on non-cyclical consumer themes. As opposed to most thematic funds that aim to generate alpha by betting on a particular sector or cycle, this fund intends to relieve investors of the unwarranted stress of relying on sectoral performance alone.

The objective of the fund is to strategically invest in a diverse range of consumer-oriented enterprises. This is achieved by carefully selecting stocks based on fundamental analysis, while consciously avoiding sectors that are prone to cyclicality within the broader consumption theme.

Not that we did not have fund schemes with generic approaches, though HDFC Mutual Fund is the first asset management company (AMC) to come up with a consumption-based theme approach. Prior to this, many fund houses had launched exchange-traded funds (ETFs) like the Nippon India ETF Nifty India Consumption and ICICI Prudential Nifty India Consumption ETF with consumption as its central theme.

How is this fund different from others?

Upon examining the fund’s potential asset allocation, it becomes evident that a minimum of 80 per cent of its portfolio will be dedicated to stocks originating from non-cyclical consumer sectors. These sectors encompass various areas such as consumer goods, consumer services, telecommunications, healthcare, media, entertainment, and publishing.

Under normal circumstances, the asset allocation (% of net assets) of the scheme’s portfolio will be as follows:

Basavaraj Tonagatti, a SEBI-registered investment advisor and founder of Basu Nivesh said, “If your investing goal is long-term (spanning several decades), and you look back at the performance of sector or thematic funds over time, you’ll see that very few of them did so consistently. Therefore, picking thematic or sector funds based on a cyclical strategy might be a costly error.”

This fund includes sectors like FMCG, consumer durables, consumer services, and healthcare services as integral components of its thematic focus. However, sectors such as automobiles, power, and realty, which tend to be more cyclical in nature, are intentionally excluded from the fund's portfolio. The theme encompasses a diverse universe, consisting of more than 300 companies with a market capitalization of at least ₹500 crore.

Amit Sinha who would be handling the working of this fund shared, “The demand for non-cyclical consumer goods and services remains relatively stable across different phases of the economic cycle. Through diligent research and analysis, we will aim to 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 focussed 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.”

Should you invest in this fund?

No doubt, consumption remains an evergreen theme in India with the domestic consumption theme contributing to more than 50 per cent of the country’s GDP. Despite the dampening effect of inflation, this contribution has gone up like no other in the past 10 years, thus, highlighting the benefits of investing in a fund backed by the consumption theme. Also, lower risk and volatility in business fundamentals are other reasons why consumption-based funds have continued to gain traction to date.

The consumption theme encompasses many themes related to daily life needs, though the fund would continue to ignore high-performing sectors like technology, infra, banks, and auto in the long run. Viral Bhatt, Founder, Money Mantra said, “If you are considering investing in a consumption-oriented mutual fund, you should also consider whether you want to invest in a fund that excludes investing in high-performing sectors such as technology, infra, banks, and auto. These sectors have been some of the best performers in the market in recent years, and they are likely to continue to grow in the future. By excluding these sectors from your investment, you may be missing out on some of the potential upside.”

It is crucial to recognize that every investment carries a certain level of risk. Even consumption-oriented mutual funds can experience losses in the event of an economic downturn or issues within particular industries or companies. Therefore, conducting thorough research and comprehending the associated risks is essential before investing in any mutual fund. By gaining a clear understanding of the potential risks involved, you can make informed investment decisions and manage your portfolio effectively.

However, all said and done, let us not ignore that it is a new fund offer (NFO), thus, implying that there is no way we can gauge the performance of this fund in the future nor assess how the fund manager would perform in the long run.

It is good to not jump into NFO investments in a bid to avail of more units at a lower price. In the end, investors must wait and evaluate several factors and parameters before deciding which fund to include in their investment portfolios.

Ultimately, the choice of whether to invest in a consumption-oriented mutual fund is a personal decision. It is crucial to carefully consider the potential risks and rewards associated with such an investment before making a final decision. Evaluating your individual financial goals, risk tolerance, and market conditions can help you make a well-informed investment choice that aligns with your objectives.