Why should you have FMCG stocks in your portfolio?

Pranati Deva
Updated: 16 Dec 2021, 09:46 AM IST
TL;DR.

Making a portfolio is the toughest part of investing. Let’s look at the reasons why FMCG stocks should be a part of that.

Why should you have FMCG stocks in your portfolio?

Why should you have FMCG stocks in your portfolio?

Fast Moving Consumer Goods (FMCG) sector is one of the very few sectors that never go out of demand. Be it an economic crisis, political uncertainty, or even a pandemic, consumers always have an appetite for FMCG.

It is the fourth largest sector in the Indian economy and mainly comprises companies whose products are used on a daily basis like toothpaste, soap, detergent, oils, cleaners, biscuits, etc.

While the demand for such products increases when people have more money or purchasing power, even in a weak economy their demand does not depreciate much as compared to other industries. People can stop buying houses or cars during the recession but not soaps and detergents.

The sector is mainly divided into 3 categories - Food and beverages, Healthcare and personal & household care. Rising population, more urbanisation, changing lifestyles have become major drivers for the growth of the sector due to which the outlook for the sector remains robust.

The demand for such products is not only in urban areas but has also reached smaller cities, towns and rural areas adding more appeal to the sector.

The sector also keeps evolving, like with the entry of Patanjali in the sector and its imminent success a number of firms like Dabur, ITC, HUL started moving towards more herbal products to capture the market.

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The FMCG sector is likely to reach 16.3 lakh-crore by 2025.

Performance

The Nifty FMCG index has been an outperformer despite obstacles. It was one of the very few indices that performed well in 2020 despite the pandemic since the demand for household products continued. It weakened but not as much as demand for other sectors like real estate, auto, etc.

The FMCG index has risen over 35 percent in the last 1 year and around 65 percent in the last 5 years. Since its launch in 1996, the index has surged over 1,50,000 percent.

FMCG stocks come under defensive stocks, that means investing in these stocks will cushion you from losses in case of a crash. When the markets tank, defensive stocks do not fall as much as the rest of the markets.

Growth

The actor has always been a steady performer. It is a safe choice but the pace of growth is a bit slow in comparison to other sectors. As per a report by ICICI Prudential, the sector has jumped 4x to 8.15 lakh crore from 2 lakh crore in 2011.

It added that the sector is likely to grow at a 14 percent CAGR and double to 16.30 lakh crore by 2025.

"More than half of the household consumer spending comes towards the FMCG sector. Deepened internet penetration and e-commerce success have led FMCG players to partner with major e-commerce platforms, serving demand digitally," stated the report.

"Growing awareness for branded products, increased spending power, ease of access, and changing lifestyles have been the major growth drivers for this sector," it added.

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Why should you buy FMCG stocks?

Reasons to buy FMCG stocks

Apart from the consistent performance displayed by the sector in the past and robust growth potential in the future, let's look at some other reasons to invest in FMCG stocks.

1) Competition: With so many firms fighting to become household names, the competition between FMCG firms is never-ending. But this is a good thing. Due to the increased competition, consumers will always come out to be the winner. Also, it will keep the firms on their toes to continue to perform better.

2) Demand: As mentioned earlier, with the rise in urbanisation and more and more people moving towards branded products across the country, the demand will only rise in the future. Also, the population of the country is very high and increasing, which will also contribute to the demand in FMCG companies.

3) Necessity items: FMCG companies manufacture products that consumers cannot do without. So there is very little chance of the FMCG firms to go out of demand. The economy is rising or falling, FMCG products will always be needed by households making them less impacted by external factors.

4) Innovation: While the demand never stops, neither does innovation. The trends in the FMCG space keep on changing and the companies have to keep up with it to sustain.

FMCG stocks have performed well in the past and are indicating a very strong future. This makes it a very viable and attractive option for your portfolio. While you can directly invest in FMCG stocks, you can also invest in them through mutual funds as well as through ETFs. Since these are defensive bets and will be impacted less than other sectors during a crash, it is a must for your portfolio.

First Published: 16 Dec 2021, 09:46 AM IST
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