With the government focusing on improving physical connectivity, financial connectivity and digital connectivity, consumption and aspirations of rural India will soon converge with urban India. 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. 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 voters.” Many experts feel that rural projects initiatives taken by the government in the run-up to elections would lead to economic inclusiveness of rural India, in 2019.

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 and even a rural demand focused smallcase.

Direct Stocks

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, having exposure to single stocks is riskier than investing in a diversified basket of stocks.

Mutual Fund

While there are many consumption focused thematic mutual funds, only the Sundaram Rural and Consumption Fund has an exclusive focus on rural consumption. Investing in a Mutual Fund has the main advantage of parking money in a diversified portfolio of stocks - even if a few companies don’t do well, the fund can still perform nicely if the broad theme does well.

However, as a Mutual Fund, it also has a few inherent drawbacks like high expense ratios (2.19% and 1.57% for regular & direct plans respectively), exit loads, no direct ownership, 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 increasing demand.

Similar to Mutual Funds, smallcases are diversified portfolios of stocks. However, this smallcase has a more concentrated portfolio consisting of 14 stocks across 11 sectors, including companies like Hindustan Unilever, Varun Beverages and Dabur India to name a few. This approach balances long-term alpha generation with diversification and also reduces associated transaction charges.