FMCG: How much exposure should you have?

Investors who have held on to their bets in the defensive FMCG sector since 2007 have made good returns. According to Value Research, FMCG funds have consistently outperformed the broad market in short term as well as long term.

FMCG funds have returned 28.42% in the past year, even as the Sensex has lost 8.12%. For a three year period and five year period, FMCG funds have returned 36.34% and 20.44%, while Sensex has given a return of 4.78% and 3.21% respectively.

FMCG stocks have outperformed the Sensex for a number of reasons. One, high interest rates coupled with high inflation, led to a slowdown in growth in core sectors of the economy in the last three years.
However, FMCG being a defensive sector was not affected much by this slowdown.

"Given the huge middle class population, FMCG companies continued to do well due to rising consumption especially in semi-urban and rural areas," explains Vijay Kedia, Director, Kedia Securities.

In a bearish market, many investors find FMCG stocks to be a safe haven, and hence continue to buy these stocks despite their valuations being high. Given this huge outperformance, what should you do with FMCG stocks now?

"At a time when growth has slowed down to 5.8% for the quarter ended March 2012, investors would do well to have 15-20% of their portfolio in a defensive sector such as FMCG.

However when the economy revives, FMCG stocks may underperform the broader market. At that time, you can reduce your FMCG exposure to 5-7%," says Amar Ranu, Manager- Third Party Products, Motilal Oswal Securities.