Weekly Musings – NFO Pick (HDFC Non-Cyclical Consumer Fund)

26 Jun 2023 , 10:03 AM

In our NFO Pick section, we have till now discussed the nuances of the NFOs of HDFC Defence Fund, Quant BFSI Funds, Edelweiss Multi-Asset Allocation Fund and Mirae Asset Multi-Cap Fund in previous issues. In this issue, we dwell upon the NFO of HDFC Non-Cyclical Consumer Fund, which has just opened for subscription on June 23, 2023. The fund will invest across large caps, mid-caps, and small caps; but its underlying theme will be to invest in non-cyclical consumer stocks in the Indian equity market. It will be a thematic equity funds, which is by default, higher on the risk and potential return scale. 

Story of India consumption and key drivers

One of the big stories that most analysts do talk about is the India consumption theme. For an economy that is poised to become a $5 trillion economy in the next 6-7 years and with a rapidly growing middle class, consumption appears to be the low-hanging fruit. However, the HDFC Non-Cyclical Consumer Fund makes a more nuanced classification by focusing on non-cyclical consumption themes. Why does the India consumption story looks attractive?

• India’s per capita income (GDP divided by population) has just about crossed $2,000. The experience of countries like China has been that consumption tends to accelerate at a rapid pace when the per capita income crosses that particular threshold. In short, India’s consumption story is at an inflection point from where it can grow geometrically.

   

• Let us not forget the demographic dividends. This year, India crossed China to become the most populated country in the world. But more importantly, it has a young population with the average age under 35. That means, India will be supplied with earning members for the next 30-35 years enabling a  big boost to consumption.

   

• Indian markets are betting on premiumization. It is not just that people are consuming more but they are also constantly looking to elevate their choices to a higher level. People want to move higher on the brands scale and the millennials especially are extremely brand conscious. That is also likely to drive consumption in India.

   

• Post the announcement of GST, there was a huge focus on formalization of the informal economy. Business not only gravitated towards the formal sector, but even the informal sector now had incentives to transform into more formal organizations compared to the past. This has much bigger implications for the opportunities for listed companies.

   

• Digitization has not only given convenience but has also boosted consumption in a big way. Online shopping is the in-thing and that in itself is driving consumption in a big way. Online shopping of groceries, apparel and even other consumer products has grown exponentially in the last few years and that has been a silent boost to consumption.

Key features of the HDFC Non-Cyclical Consumer Fund NFO

The HDFC Non-Cyclical Consumer Fund NFO  will invest the corpus across large caps, mid-caps, and small caps, while maintaining over 80-85% exposure to equities. While the theme will be non-cyclical consumption, the fund will be agnostic towards market cap. It will have the flexibility to distribute the corpus across large caps, mid-caps, and small caps.

• The HDFC Non-Cyclical Consumer Fund will classify as a thematic equity fund. Typically, these thematic funds are more focused on a particular sector or theme. While they offer the potential for higher returns, they also come at higher risk and on the Risk-O-Meter would classify as a high risk fund.

   

• Being a thematic fund, the HDFC Non-Cyclical Consumer Fund will invest across subsets of FMCG, consumer goods and miscellaneous consumer stories. Under FMCG, the fund will invest in packaged foods and home & personal care. Under consumer goods, the fund will invest in consumer durables, retail, leisure, QSR, media and entertainment. However, it would avoid autos and realty; being more cyclical in nature. In the miscellaneous category, the HDFC Non-Cyclical Consumer Fund will invest in telecom, consumer digital and healthcare services.

   

• The thematic equity fund will be invested at least 80% in equities and specifically in the non-cyclical consumption space. It will be market cap agnostic but would focus on specific companies that are either niche leaders or that are gaining visible market share in their particular niche. The fund will also focus on companies that are likely to see steady and secular growth over the long term.

   

• Consumption theme in India is likely to unfold in India in a big way from the current inflection point. Most of the quality non-cyclical consumer companies in India have manifested stable earnings and stable ROE. They are lower on the risk scale due to the low volatility in earnings. Government intervention in the sector is limited and it enjoys sticky demand, which enables them to build brand loyalty.

   

• In terms of suitability, the HDFC Non-Cyclical Consumer Fund NFO would be suited to investors with an investment horizon of 5 years and above. Empirical data suggests that a 5-7 year perspective works best in the case of such thematic funds. The approach of the fund manager would be a mix of top-down and bottom-up.

   

• Dividends will be fully taxed in the hands of the investor and will attract TDS. If the fund is held for less than 1 year, the short term capital gains (STCG) will be taxed at 15%. If units are held for more than 1 year, long term capital gains (LTCG) and will be taxed at a flat rate of 10%, after the base LTCG exemption of Rs1 lakh annually; without indexation

Thematic funds can generate alpha if a long term approach is combined with entering the sector at an inflection point.

How has consumption performed versus Nifty?

How has consumption theme in India performed over different periods of time as compared to the Nifty; both on returns and on risk.

Holding Period	Nifty-50 TRI Returns	Consumption TRI Returns	Nifty-50 TRI Risk (STDEV)	Consumption Risk (STDEV)	Nifty-50 TRI Risk/Reward	Consumption Risk/Reward
1 Year	14.6%	14.9%	23.5%	17.7%	0.62X	0.84X
3 Years	11.4%	13.3%	6.1%	6.2%	1.89X	2.16X
5 Years	11.2%	13.7%	4.2%	4.2%	2.69X	3.24X
10 Years	11.3%	14.2%	2.4%	1.8%	4.65X	8.09X

Data Source: HDFC Mutual Fund Brochure

As can be seen from the above table, consumption themed funds as an asset class have done well over longer time frames. If you look at a 3 year time frame, the average CAGR returns given by these consumption funds in India is 13.3%, which is better than the 11.4% given by the Nifty. However, as you longer timeframes of 5 years and 10 years, the outperformance of the Consumption theme over the Nifty is much more pronounced.

But returns are just one side of the story; and risk is the other side. We use standard deviation as a proxy for risk and then calculate the ratio of rewards to risk. If you look at a 3 year period, the ratio of rewards to risk is 1.89 for the Nifty and 2.16 for the consumption funds. However, as you go longer into 5 years and 10 year time frames, the outperformance of the consumption theme in risk-adjusted return terms also keeps growing.

Glance at the HDFC Non-Cyclical Consumer Fund NFO

Here are some details of the HDFC Non-Cyclical Consumer Fund NFO you must know to decide on investing in the fund.

1. The fund opened for subscription on June 23, 2023 and the NFO subscription will close on July 07, 2023. 

    

2. Entry loads do not exist in India, but if the fund is redeemed within 365 days from the date of allotment, it will attract an exit load of 1%. There will be no exit load after that.

    

3. The minimum investment in the HDFC Non-Cyclical Consumer Fund NFO would be Rs100 in the NFO and in multiples thereafter. 

    

4. The fund offers Regular and Direct plans for the investors. In addition, investors can either choose the Growth option or the IDCW (income distribution cum capital withdrawal) option.

    

5. How will the fund be benchmarked? It will be benchmarked Nifty India Consumption TRI (total returns index). Amit Sinha will be the fund manager to the scheme.

The HDFC Non-Cyclical Consumer Fund NFO is an opportunity to benefit from a very India-specific theme like non-cyclical consumption.