Weekly Musings – NFO Pick (SBI Nifty India Consumption Index Fund)

21 Oct 2024 , 11:30 AM

CONSUMPTION + INDEX = FUTURISTIC + PASSIVE

Like the US, even India is essentially a domestic consumption story. The Nifty India Consumption Index Fund from SBI is about participating in the geometric growth in the India consumption story in the next 10 years. The logic is quite enticing. As India continues to be the fastest growing large economy in the world for the fourth year in a row, it is adding billions of dollars of consumption money. Combine that with a young Indian population, demographic dividends, and you have the perfect setting for the consumption theme. That is exactly where the SBI Nifty India Consumption Index Fund is positioned.

SBI Nifty India Consumption Index Fund, being a passive fund, will be largely indifferent to stock selection. Their portfolio is the index (Nifty India Consumption Index). The fund will replicate and mirror the index with a portfolio that matches the index in terms of the sectoral and stock composition as well as the appropriate weightages. Valuations have been a sort of concern in the consumption theme, but you have the advantage of aggressive growth, strong brands, and a virtually limitless market. let us now turn to the affirmative story on why India consumption could be the theme to watch out for in the next decade.

According to the World Economic Outlook (WEO) reported published by the IMF; India’s per capita income has grown from $2,000 in the year 2021 to $2,500 in 2024 and slated to touch $4,200 by year 2029. That would unleash substantial purchasing power in India. Secondly, India has one of the youngest age mix and this demographic dividend will ensure sustainable growth in middle-class population with a capacity and propensity to spend. This spending middle class is expected to expand from 60 Crore in 2024 to 120 Crore by 2030.

HAS CONSUMPTION THEME REALLY DELIVERED THE GOODS?

The SBI Nifty India Consumption Index Fund, being a passive index fund, would largely perform based on how the index performs. Let us quickly look back at how the Nifty India Consumption Index TRI has performed historically. Here is a quick reality check on the Nifty India Consumption India, which the fund is supposed to mirror.

1. How has been the performance of the Nifty India Consumption Index vis-à-vis the benchmark Nifty 50 index. If we go back to the start of the year 2006 and look at returns over the past 18 years, then a stark dichotomy emerges. We are referring here to the period between January 2006 and September 2024. During this period, an investment of ₹1 Lakh in the Nifty 50 index would have grown to ₹9.10 Lakh today; implying CAGR returns of 12.5% annually. If you look at the Nifty India Consumption Index during the same period, an investing of ₹1 Lakh would have grown to ₹12.80 Lakh which implies CAGR returns of 14.6% annually. Clearly, the Consumption index has beaten the Nifty 50 index comfortable by an annualized margin of 207 basis points.
2. Let us look at shorter time frames of 3-year and 5-year returns. We will ignore the 1-year returns since they can get skewed by outperformance in one phase of the cycle. Let us first look at 3-year returns. In terms of 3-year returns, the Nifty India Consumption Index earned 22.5% CAGR, compared to 14.9% CAGR for the Nifty 50. That is an outperformance by 7.60 percentage points over the Nifty 50. How does the picture look over 5 years? Nifty India Consumption Index earned 22.3% CAGR over a 5-year period, compared to 19.0% CAGR for Nifty 50. Even in this period, the Nifty India Consumption index has outperformed the generic Nifty 50 index by 3.30 percentage points.
3. Till now, we have been talking largely about lumpsum investment, but that is hardly the preferred mutual fund investing route for most retail investors. They prefer the systematic investment plan (SIP) route. SIP is not only pragmatic, as it syncs with the income flows, but also offers the added advantage of rupee cost average and the luxury of not worrying about timing the market. Let us look at SIP performance comparison over 5 years and 10 years. Unlike lumpsum investments, SIPs are not measured by CAGR returns, but by XIRR (extended internal rate of return) due to their periodic flows. Over a 5 year period, a fixed monthly SIP on Nifty 50 would have earned SIP IRR of 20.6%, while Nifty Consumption index would have outshone at 26.83%. Over a 10 year period, a fixed monthly SIP on Nifty 50 would have earned SIP IRR of 15.36%, while the Nifty Consumption index would have done better at 17.92%. In both cases, the ratio of final value to invested outlay (wealth ratio) is sharply higher for the consumption index.

It does look like the Nifty Consumption Index has done a much better job than the Nifty 50; irrespective of whether you consider investing in lumpsum or via SIPs. One point to note is that the outperformance of consumption theme is a lot more pronounced in last 5 years.

WHAT DOES NIFTY CONSUMPTION INDEX COMPRISE OF?

Having seen the returns and performance of Nifty Consumption Index, let us also understand what this theme comprises; both in term of sectoral mix and in terms of stock mix. If you look at the sectoral mix of the Nifty Consumption index, 5 sectors account for 88% of the overall index. Here is a quick dekko.

Big 5 – Consumption Sectors	Weight in Index
Fast Moving Consumer Goods (FMCG)	31%
Automobiles and Auto Components	22%
Consumer Services	15%
Consumer Durables	10%
Telecommunications	10%

Data Source: NSE Indices

If you look at the top 10 stocks in the Nifty Consumption Index, it comprises of 3 FMCG companies, 3 auto companies, 3 consumer services companies and 1 telecom company.

Top Companies	Weight in Index
ITC Ltd	10.05%
Bharti Airtel	9.75%
Mahindra & Mahindra (M&M)	7.75%
Hindustan Unilever Ltd	7.40%
Maruti Suzuki	4.90%
Zomato Ltd	4.78%
Trent Ltd	4.73%
Titan Company	4.45%
Asian Paints	4.23%
Bajaj Auto	3.85%

Data Source: NSE Indices

These top-10 companies in the Nifty Consumption index comprise nearly 61.9% of the overall index. The index is a free float weighted market cap index. The Nifty Consumption Index has a P/E ratio of 52.38X and dividend yield of 0.84%. This sector has, however, sustained premium valuations over long periods. This can be attributed to an amalgam of strong India consumption story and strong brands built by consumption companies. Of course, the SBI Nifty Consumption Index Fund will look to replicate the index on TRI basis with an equity exposure of 95% to 100%. The focus of the fund manager would be to minimize the tracking error to the bare minimum.

HOW CONSUMPTION FUNDS HAVE PERFORMED IN INDIA?

The SBI Nifty India Consumption Index Fund; being a passive thematic play manages to capture the consumption theme and its growth in India. A small clarification here. The SBI Nifty Consumption Index Fund is a passive fund linked to the Nifty India Consumption Index TRI; while the funds we have considered in this ranking are all active thematic funds benchmarked on the same Nifty India Consumption Index. These consumption oriented funds have been ranked on 1-year returns.

Scheme Name	NAV (in ₹)	Return (%) 1-Year	Return (%) Launch	Daily AUM (₹ in Crore)
HSBC Consumption Fund	15.01	46.84	43.02	1,603.61
Tata India Consumer Fund	46.39	40.98	19.02	2,458.26
SBI Consumption Opportunities Fund	208.15	40.21	16.45	3,121.86
Mahindra Manulife Consumption Fund	24.12	39.94	15.99	395.99
HDFC Non-Cyclical Consumer Fund	14.87	39.22	36.65	904.31
Baroda BNP Paribas India Consumption Fund	33.15	39.10	21.64	1,516.70
UTI India Consumer Fund	61.11	39.07	11.08	744.65
Mirae Asset Great Consumer Fund	98.59	38.50	18.37	4,362.57
Nippon India Consumption Fund	206.34	37.41	16.28	2,101.25
ICICI Prudential Bharat Consumption Fund	26.34	35.98	19.17	2,989.83
Aditya Birla Sun Life India GenNext Fund	222.72	35.45	17.53	6,105.92
Sundaram Consumption Fund	100.70	32.59	13.34	1,642.99

Data Source: AMFI

The table above provides the performance corpus of the 12 active consumption funds available in India currently. Active consumption funds have an AUM of ₹27,948 Crore with the AUM fairly evenly spread out across the various fund houses. We have ranked on 1-year returns; since comparable data for 3 years is not available.

• Let us first look at the returns on the above funds over a 1-year period. On a 1-year returns basis, these funds generated maximum returns of 46.84% and minimum returns of 32.59%, which is a fairly attractive worst-case scenario. The average returns over a 1-year period was 38.77%, which is impressive. There was a 100% probability of being among best performing asset class among asset classes in India over a 1-year period.
• Let us turn to the returns on these funds since inception. These funds generated maximum returns of 43.02% CAGR and minimum returns of 11.08% CAGR, which is not a very healthy worst-case scenario. The average returns since inception were impressive at 20.71%. The high dispersion is more due to varying time frames since launch and must be taken with a pinch of salt.

Has the consumption story really helped beat the index. While consumption may have been a slightly ambivalent theme for a long time, the theme has been specifically buoyant in the last 4-5 years. The 1-year dispersion is quite low and that could be more due to the run in equities in the last one year. One big shift in the consumption theme in the last few years is that it has shifted from being a passive theme to an active theme.

GLANCE AT THE SBI NIFTY INDIA CONSUMPTION INDEX FUND NFO

Here are key details of the SBI Nifty India Consumption Index Fund NFO.

• The NFO opened on October 16, 2024 and closes on October 25, 2024. Being an open ended theme based index fund, the fund will open for sale and repurchase within 5 days of the date of allotment. The sale and repurchase prices offered by the fund will be linked to the net asset value (NAV) of the fund.
• Although, this is a passive index fund on the consumption theme, the SBI Nifty India Consumption Fund is classified as Very High Risk on the SEBI Risk-O-Meter. This classification can be attributed to its predominant equity exposure (95-100%), thematic concentration on consumption, and the risk of entering markets at elevated levels. As a passive fund, there is the tracking error risk of not reasonably mirroring the index TRI.
• The investment objective of the fund is to offer a passive thematic play on consumption. The fund intends to deliver returns that mirror the Nifty India Consumption Index TRI and minimize tracking error. However, there is no guarantee or assurance of returns and returns divergence from the benchmark index is an underlying risk in the fund.
• Under SEBI regulations, there are no entry loads, but conditional exit loads would be imposed on exit. There will be an exit load of 0.15% of the redemption price, if the units are redeemed within 15 days from the date of allotment. However, notwithstanding the loads structure; it is advisable to hold such thematic funds for a minimum period of 5-7 years to get full benefits of the passive fund and allow consumption theme to play out.
• The SBI Nifty India Consumption Index Fund will offer regular and direct plans. In addition, it will also offer the Growth Option, IDCW (Payout) option and the IDCW (Reinvestment) option. Here IDCW refers to (income distribution cum capital withdrawal).
• Mr Harsh Sethi will be the fund manager and would be assisted by his team. However, it may be noted here that, being a passive fund, the endeavour of the fund manager is not to beat the index, but just mirror the Nifty India Consumption Index TRI; in terms of the portfolio composition and the specific stock weightages.
• The minimum investment amount in the NFO will be ₹5,000 and multiples of ₹1 and additional purchases will be ₹1,000 and in multiples of ₹1. The fund also offers customized plans that are compatible with systematic investment plans (SIP), systematic withdrawal plans (SWP), and systematic transfer plan (SWP). For the purpose of income tax, the fund will be classified as an equity fund.

The SBI Nifty India Consumption Index Fund offers a passive gateway to investors to participate in the highly promising India consumption story through a passive portfolio that is predicated on the consumption theme. Also, being an equity fund, it would be more tax efficient for investors in the long run. We look at the tax implications in the last paragraph.

TAX TREATMENT FOR SBI NIFTY INDIA CONSUMPTION INDEX FUND

SBI Nifty India Consumption Index Fund will be classified as an equity fund for tax purposes. The tax provisions below are pursuant to the changes made in the full Union Budget presented on July 23, 2024; and changes are effective for transactions after July 23, 2024.

• Dividends declared (if any) by the fund will be taxed at the peak rate of tax applicable. In addition, if the overall dividends exceed ₹5,000 in a year, they will be subject to tax deduction at source (TDS) at the extant TDS rates.
• Time frame for classification as long term capital gains (LTCG) will remain 1 year for the SBI Nifty India Consumption Index Fund. STCG (held for less than 1 year) will be taxed at 20% on gains plus cess at 4%, making effective STCG rate 20.80%.
• The LTCG on the fund (1 year holding and above) will be taxed at a flat rate of 12.5%. However, threshold exemption limit has been increased from ₹1 Lakh to ₹1.25 Lakhs. In this case, the actual tax impact will be 13% after including 4% cess.
• What about losses? Short term losses can be written off against short term capital gains and long term capital gains. However, long term capital losses can only be written off against long term capital gains. Both, short term capital losses and long term losses (to the extent unabsorbed in the current fiscal year) can be carried forward for a period of 8 assessment years.

It is what you earn from the SBI Nifty India Consumption Index Fund in post-tax terms that matters. That is why, it is essential to understand tax implications.