No wonder, products like detergents, soaps, tooth-paste and even chocolates have become an indispensable part of our lives. The FMCG sector draws its strength from the fact that demand for these products will never dry up and hence, performance is not impacted by economic cycles. But, the glitter and glamour of FMCG companies is just one side of the story. The harsh truth is that the FMCG sector has underperformed the broad markets over the past one year - partly due to investor penchant for technology stocks and partly due to a sharp fall early this year. For the year ended September 30, 2000, the i-SEC FMCG Index has lost a whopping 25 per cent. Nevertheless, investors have largely stuck to FMCG funds as there has hardly been any erosion in their base capital. At the same time, the lacklustre performance of the sector is keeping fresh investments at bay.

Despite lower than expected financials of these companies in the past few quarters, as also the adverse impact of the rationalisation of the excise slabs in the current Budget, there is still no reason why you should not include FMCG stocks in your portfolio. The Indian corporate sector offers an elaborate menu of FMCG companies, which have had a long presence among Indian consumers. This includes some of the prominent global consumer companies like Unilever's Hindustan Lever, Colgate, Cadbury, Nestle, Proctor & Gamble and Gillette (Indian Shaving). These companies possess strong brands, distribution network, professional management, financial health and a strong parent.

Besides, the challenging vista of a capturing a larger part of the urban markets as also moulding of the rural markets gives these companies an immense potential for growth. Case for FMCG funds investors, who desire a pie of the FMCG cake, would be wise to invest through mutual funds, which are dedicated to the sector. The reasons for thisassertion are many. First, investors can buy into FMCG companies by investing as low as Rs 2000 or 5000, while investing directly in stocks would have taken a sizeable investment. With funds being managed by professionals, you do not need to burn midnight oil to track the sector and day to day movements in stock prices. The three dedicated FMCG funds are Prudential ICICI FMCG (PRU FMCG), Kothari Pioneer FMCG (KP FMCG) and Magnum FMCG from SBI Asset Management Company.

All the thre funds are relatively young since they were launched only last year. KP FMCG is the only fund with a positive return of 8.46% since inception in April '99. On the other hand, PRU FMCG, launched at the same time as KP FMCG, has turned in a negative 4% while Magnum FMCG, launched in July '99, has returned a negative 12.86%. Nevertheless, all the funds have so far comprehensively outperformed the i-Sec FMCG index.

However, before you decide upon your pick from the troika, it would be interesting to note the distinction among these funds with respect to their investment style and stock picks. For instance, Kothari Pioner FMCG Fund holds a chunk of its investments in media companies. Whether media is an FMCG product is debatable but fund managers at Kothari Pioneer clearly believe that media is indeed a consumer product since masses devour television programmes regularly like they brush or take a bath. As a result, Zee Telefilms has been the top holding for a large part of the fund's tenure and has stood the fund in good stead vis-à-vis its peers. Further, the prospectus of the fund clearly states that "the fund would be investing at least 65% in FMCG", implying that it has a leeway to invest in equities of other sectors if it so desires. Another interesting distinction is that while KP FMCG is almost fully invested in large-cap stocks, PRU FMCG is equally divided between large and mid-cap FMCG stocks.

On the other hand, Magnum FMCG is at the extreme end of spectrum with nearly 75 per cent of the corpus invested in mid-cap stocks while the balance almost equally divided between large and small cap stocks. Thus, although the three funds are dedicated to the FMCG sector, the choice of stocks can still have a dramatic impact on returns.

While Kothari Pioneer focuses on stocks of well-established FMCG companies with a large equity base, Magnum FMCG Fund attempts to zero in on those FMCG stocks, which also have strong brands, but are small players. At the same time, these companies also have the potential to become a bluechip tomorrow.

Given the fragmented nature of the FMCG sector, there is also an immense scope for mergers and acquisition, where the large compatriots will surely gobble small players with a brand equity and formidable presence in the market. This will only give an impetus to returns from FMCG funds. Given the defensive nature and steady growth in the FMCG sector, investors can surely supplement their volatile holding in technology funds with a 20-25 per cent of their total investment in an FMCG fund. Further, investors also have the option of putting money in funds, which are not dedicated to the FMCG sector, but invest a large chunk of their money in these companies.