Increasing rural consumption has been one of the primary & consistent stories of the Indian economy, given the size of the rural population & the number of farmers in India. Budget 2019 gave this theme an even bigger push with the announcement of major reforms like:
- A package of ₹75,000 crore under the Pradhan Mantri Kisan Samman Nidhi, where the government will give Rs 6,000 per year to farmers
- 2% interest subvention in animal husbandry and fishery activities
- An allocation of ₹60,000 crore under the MGNREGA scheme for 2019-20
In a recent note, Morgan Stanley highlighted that “Election results are largely driven by the economic growth cycle. In particular, growth in the rural and semi-urban economy is important to watch as farmers are the biggest voter.” Many experts feel that increased government spending on rural projects in the run-up to elections would lead to an increase in rural income/spending in 2019.
This has already been in action in the last few months, with the above-mentioned announcements from Budget 2019 as well as other recent changes – for example, in the last few months the Government also unveiled a new agriculture export policy that aims to double agriculture exports by 2022. Also announced were plans to increase the amount of institutional credit available for the agriculture sector to ₹11 lakh crore. And after winning some of the recent state elections, the first thing the new Congress CMs did after winning was clear proposals to waive-off farm loans of up to ₹2 lakh, as promised by Congress President Mr. Rahul Gandhi.
As an investor, every change brings an opportunity, especially a national election. For investors looking to take advantage of the rural consumption theme, there are few popular options to choose from – direct stocks, thematic mutual funds, as well as a rural-demand focused smallcase.
This method involves identifying companies that will benefit as the rural consumption theme plays out. These could include FMCG giants like Hindustan Unilever & ITC, whose products are deep-rooted with rural consumers, cement companies like Ambuja, automobile companies like Mahindra & Escorts Ltd., and so on.
Since there are many such industries, and numerous companies within each sector, research can become very time-consuming and require good knowledge of security analysis. Moreover, investing in single stocks is far risky compared to investing in a diversified portfolio of stocks.
Mutual funds are a popular instrument to get exposure to equities. A mutual fund is a diversified basket of stocks that is managed by investment professionals in-line with the fund’s defined objectives – in exchange for their initial investments, investors get fund units in return.
While there are many consumption focused thematic mutual fund, only two have an exclusive focus on rural consumption – these are the Sundaram Rural and Consumption Fund and the less than 1-year old Mahindra Rural Bharat And Consumption Yojana.
Investing in a mutual fund has the main advantage of investing in a diversified portfolio of stocks – even if a few companies don’t do well, the fund can still perform nicely if the overall portfolio does well. Also, since they are professionally managed, the investors don’t have to worry about market developments. However, there are also a few inherent drawbacks like exit loads, no direct ownership, high expense ratios (2.19% and 2.79% for regular plans of the Sundaram & Mahindra funds respectively) etc.
Rising Rural Demand smallcase
The Rising Rural Demand smallcase has companies that either derive a significant amount of their revenue from rural India or are rapidly increasing their presence in rural areas in order to benefit from the region’s increasing demand. This smallcase is managed by a team of SEBI licensed professionals, who rebalance the portfolio every quarter to ensure that it remains true to its theme.
Just like mutual funds, smallcases are also diversified portfolios of stocks. However with smallcases, you get direct ownership of stocks instead of mutual fund units, and as such are a legal shareholder. This gives investors the ability to change the portfolio and buy/sell the stocks anytime they want, at no exit loads or penalties. To understand the differences between mutual funds & smallcases, read our post on why smallcases behtar hai.
The Rising Rural Demand smallcase has a concentrated portfolio of 14 stocks across 11 sub-sectors, including companies like Hindustan Unilever, Varun Beverages, and Dabur India – click here to view the remaining list of stocks. This approach balances long-term alpha generation with diversification and also reduces associated transaction charges.Comparing the Rising Rural Demand smallcase with rural consumption focused thematic mutual funds
|Sundaram Rural & Consumption MF||Mahindra Rural Bharat and Consumption Yojana||Rising Rural Demand smallcase|
|Data as of March 2019|
|Objective||Invest in equity & equity related instruments that will benefit from the rural and/or consumption theme||Invest predominantly in equity & equity|
related instruments of entities engaged in and/or
expected to benefit from the growth in rural India
|Invest in equity instruments that will benefit from the rural consumption theme|
|Fees / TER||2.08% / 1.35% for Regular / Direct||2.79% / 0.92 for Regular / Direct||Pay brokerage only when you transact|
|Exit Load||1% if exited within 1 year||1% if exited within 1 year||No exit load|
|No. of stocks||62||30||15|
|Top 3 holdings||1. ITC (5.16%)|
2. Hindustan Unilever (5.05%)
3. Mahindra & Mahindra (4.91%)
|1. Cash (5.46%)|
2. ITC (4.33%)
3. Bata India (4.09%)
|1. Hindustan Unilever (12.0%)
2. Colgate-Palmolive (10.0%)
3. Shriram Transport Finance (8.5%)
|Top 10 (% of AuM)||32.08%||37.54%||70.81%|
|Direct Ownership||No - the AMC issues units||No - the AMC issues units||Yes|
|Instant Liquidity||No - entire redemption can take 1-3 days||No - entire redemption can take 1-3 days||Yes|
|Double Taxation of Dividends||Yes - DDT is deducted||Yes - DDT is deducted||No - tax-free up to ₹10 Lakh|
|Launch||January 2013||November 2018||July 2016|
Rising Rural Demand smallcase
Companies benefitting from rural consumption theme