FMCG or the fast-moving consumer goods sector comprises of companies that manufacture products that are consumed by human beings on a daily basis. With rising population and increasing rate of urbanization in India, it goes without saying that the overall growth outlook for the sector continues to remain attractive. This is well reflected, because companies like Patanjali, which are the new entrant in the segment, have delivered significant growth performance, thus indicating that it is the beginning of a glorious future.

How Has the Sector Grown?

The FMCG sector has seen steady growth over time and has grown from Rs 2 lakh crore in 2011 to over Rs 4 lakh crore in 2017. The growth is still continuing with rising disposable income and rising consumption expenditure. The growth for the sector is estimated at over 15% when compounded annually. In addition, the Finance Minister on February 1, 2018, while presenting the Union Budget 2018-19, announced 100% foreign direct investment (FDI) in single-brand retail. Furthermore, moves such as reduced corporate tax for medium, small, and micro-enterprises are likely to provide a boost to the sector. Finally, the sector has come under the Goods and Service Tax (GST), which is likely to benefit the sector, over the next few years.

Why Should You Hold Stocks of FMCG Companies/Funds?

There are several reasons to hold FMCG companies/funds in a portfolio:

  • Rising Competition 

    The sector has been witnessing tremendous competition off late with many new entrants in the market. Companies like Patanjali, promoted by yoga guru Baba Ramdev has grown leaps and bounds to become a household name. Reacting to this,  Hindustan Unilever Limited, ITC Ltd, Dabur etc. have been launching new products across different segments and they have shifted their focus to manufacture organic products. We believe this competition is never ending and will continue to create value for FMCG companies as more and more products are manufactured and customers have something new to grab every time.

  • Rising Demand 

    A simple answer to FMCG growth is that India is home to over 1.3 billion people that account for nearly 16-17% of the world’s population. In addition, around 60% of the population is from rural areas where the consumption expenditure has been rising over the past few years. We believe that as long as industrialization, along with government policies are made to upgrade rural areas, the sector will continue to grow in terms of valuation, thereby offering healthy returns to investors.

  • Innovation  

    One of the most interesting developments seen in the sector is innovation which was previously not the mainstream focus. While start-ups are facilitating online shopping and door-to-door delivery, the FMCG companies are continuously upgrading its research and development facilities and launching new products. Interestingly, the world of start-ups is now open for the FMCG sector and several companies such as Hector Beverages are launching new products keeping in mind the requirement of the current generation. These companies have realized the “me too” strategy and have built a model where they can rely on their internal funds instead of investor funding.

Track Record of the FMCG Sector

Since 2008, the sector has given massive returns at a CAGR of 17%. Despite being majorly hit by demonetization, the FMCG shares managed to give positive returns to its investors and in less than two years time, the BSE FMCG Index already climbed 40%.

The Trend of BSE FMCG Index

Generally speaking, FMCG stocks rise at a slower rate during a bull run, but during a recession, they remain much steadier compared to most other sectors. Also, given the fact that nearly all the FMCG-majors have lined up new product launches, it is imperative that they will continue to shield your portfolio from any adverse movement. As a rule, it is not wise to invest a large part of your corpus in sector funds; you should try to limit your exposure to 10-15 percent of the total portfolio. Some of the notable funds in this sector include SBI Consumption Opportunities Fund, ICICI Prudential FMCG Fund. For details on other mutual funds, feel free to use Groww’s fund explorer here.

Happy investing!

Disclaimer: The views expressed here are those of the author. Mutual funds are subject to market risks. Please read the offer document before investing.