Consumption and FMCG funds: the defensive play that isn't always defensive

The consumption story is the easiest one in India to tell. A billion-plus people, incomes rising, a young population moving up the spending ladder. It is also true. What is less obvious is why the funds built on it have so often been a disappointing way to own it.

What the category holds

FMCG funds hold fast-moving consumer goods: soaps, detergents, packaged foods, beverages, tobacco, personal care. Steady demand, strong brands, low capital intensity, high return on capital.

Consumption funds are broader — the same staples plus discretionary spending: autos, retail, quick-service restaurants, paints, consumer durables, apparel, jewellery, hotels, and increasingly consumer-facing internet businesses.

That difference matters more than the shared word suggests. Staples are defensive; discretionary is cyclical. A consumption fund that leans discretionary will fall with the economy, not resist it. Before assuming you have bought a defensive holding, read the actual portfolio.

Both are thematic schemes, so at least 80% must sit in the theme, and — under SEBI's revised categorisation — the portfolio may not overlap more than 50% with the AMC's other equity schemes, large-cap funds excepted.

Why "defensive" is only half true

The defensive claim rests on something real: people keep buying soap in a recession. FMCG earnings are genuinely less volatile than the market's, and the category's downside capture is often the best number on its factsheet. In a sharp market fall, staples typically lose less.

Two things complicate it.

First, defensiveness is priced. Indian FMCG has spent long stretches trading at very high multiples precisely because everyone agrees the earnings are reliable. Paying 60× for predictable 10% growth is not a defensive act. When a market de-rates, the expensive-and-safe often falls further than the cheap-and-ugly, because there is more multiple to lose. A defensive business is not the same as a defensive investment.

Second, "defensive" describes drawdowns, not returns. These funds are also structurally slower in a broad bull market, and over a full cycle the smoother ride can cost real compounding. The Sharpe may look good while the absolute return lags — which is exactly what the ratio is designed to tell you, and exactly what people ignore.

The structural headwinds worth knowing

• Premiumisation is not the same as volume growth. Much of the reported revenue growth in Indian consumer companies in recent years has come from price and mix rather than from more units being sold. A story about a billion new consumers is a volume story; check whether volumes are actually growing.
• Rural demand drives the swing. FMCG volume growth in India is unusually sensitive to the monsoon, food inflation and rural wages — a macro exposure most buyers of a "defensive" fund do not think they are taking.
• Distribution moats are eroding. Direct-to-consumer brands, quick commerce and private labels attack precisely the shelf-space advantage that justified the premium multiples.
• Input costs compress margins on a lag. Palm oil, crude derivatives and packaging costs move faster than a company can reprice.

Where it legitimately fits

• As a deliberate volatility reducer for an investor who has demonstrated they cannot hold through a deep drawdown. Lower downside capture is a real property, and a strategy you can actually stay invested in beats a better one you abandon.
• As a satellite tilt for someone who believes the premium multiples are justified and wants more of India's domestic demand than the index gives them.
• Not as a substitute for debt. This is the most common misuse. If your goal is capital stability, a debt fund does that job; an equity fund that falls slightly less than other equity funds does not. In March 2020 the whole market fell together, defensives included.

Before you buy

1. Check the overlap. Large-cap and index funds already carry meaningful FMCG weight. You may be adding a second helping.
2. Read the staples-versus-discretionary split. It determines whether this is a defensive holding or a cyclical one.
3. Look at the valuation, not the story. The P/E on the fund page is the price you are paying for the predictability.
4. Judge it against consumption peers, over a full cycle, using rolling returns — not against a broad index in a year when banks and capital goods led.

Pitfalls to avoid

• Treating it as a bond substitute. It is equity. It falls in equity drawdowns.
• Assuming the demographic story translates into fund returns. A great industry bought at a demanding price is a poor holding; price and prospects are separate questions.
• Ignoring what you already own. Diversified funds hold these companies.
• Buying after a defensive run. Staples lead when the market is frightened; that is when they are dearest and their subsequent returns weakest.
• Confusing low volatility with low risk. Placid is not safe. It is only placid so far.
• Comparing across categories. A consumption fund and a small-cap fund are not on the same scale, and comparing their returns is comparing regimes.

Key takeaway

Consumption and FMCG funds own genuinely high-quality businesses with the steadiest earnings in the market — and that steadiness is already in the price, which is why "defensive" describes the drawdown rather than the outcome. The category can reduce portfolio volatility for someone who needs that to stay invested, but it is not a substitute for debt, it carries a rural and input-cost macro exposure most buyers do not notice, and it is at its most expensive exactly when its defensive reputation is most attractive. Check the staples-versus-discretionary split and the multiple you are paying before you accept the word "defensive" at all.