Sundaram Mutual makes a case for large cap dominance

“The customer has gotten used to regular returns from fixed deposits (FDs). If you want to break the pattern, you have to promise a higher return for the higher risk of him going away from a government-guaranteed returns and capital-protected system of FDs. The industry has always had a challenge of having to innovate and to create products to take on the FDs,” says Sunil Subramaniam, Managing Director, Sundaram Mutual. Spearheading the company that has over Rs 34,000 cr Assets under Management (AUM), he shares insights into the industry. Excerpts from an interview with DTNext:

The penetration of mutual funds (MF) has been in the high single-digit/low double-digit because of the industry’s role in the customer’s mind. While we perceive it as crucial to the middle class in their effort to beat inflation, it is a question of demand and supply of products. When inflation is rising, the producer benefits and it is he who is listed in the stock market. Given the volatility the market has experienced over the last many years, customers are now taking risk to beat the inflation.

The alternative is a bank FD that government has supported by never allowing banks to fail, thereby giving comfort to the investor. That’s why a majority of the savings has gone there in the past. On its part, the industry has, over time, laid the foundation to compete against these bank deposits, by trying to take a few more risks on the credit funds and the debt side by giving better returns and to create hybrid products such as balanced fund and MIPs (Monthly Income Plan).

To expand the market, the industry has taken more credit in debt funds and to create monthly dividend plans out of balanced funds. Over the last 3-5 years, this has succeeded in increasing market penetration. Unfortunately, in the last 18 months, some of these have taken a beating owing to the IL&FS crisis, thereby shaking the customer’s confidence. Also, the periodic dividend model plan has been shaken by the new regulation of it being taxed in the hands of the customer. These are temporary setbacks for the MF industry. Hence, the products that are being marketed to the middle class are facing challenges. This year, the industry has seen a lot of continuous redemptions.

The silver lining for the industry has been the consistent marketing efforts to bring out the SIP benefits, gaining acceptance as a right long-term wealth creation solution. SIP is seeing a surge with the distributors pitching it in the right way. This will go from strength to strength in the future. Post re-categorisation, most well-performing and large-sized funds have been moved into the multi-cap category. The industry has now given itself the strength and flexibility to manage the volatility in the market on behalf of the investor. About 44% of the industry is in multi-caps, having the ability to manage its allocation across diverse sectors. Multi-cap has got Rs 27,000 crores inflow. Over the next three years, I am confident that investors will be happy with the returns from the stock market.

Apart from the tariff war and the coronavirus, China has suffered fundamental structural damages that can now work in India’s favour. China may lose over 5 crore of its work force over the next decade owing to demographics. Also, their success in manufacturing sector has pushed up the per capita income in China significantly. So, there is a situation of reducing labour pool and hence costs are going up in China.

India’s demographic advantage will however remain stable for the next 30 years. It will add another 100 million people. Our per capita income currently is where China was 10 years ago. From a perspective of labour cost and talent availability, India is well-positioned to take advantage of this manufacturing wave. We have abundant and unmatched supply of labour, the per capita income in India is still low, the ease of doing business is improving and tax rates are now low for FDIs to come in. Global companies are looking at manufacturing options away from China. Chinese manufacturers themselves are looking at India to outsource.

A lot of new manufacturing financed by foreign capital following the tax rate cuts will mean that funds will be available in abundance and FDI flows will help create jobs in the country. If an investor is ready to wait for 10 years, it is likely he will quadruple his wealth through equity.

The customer is owned by an advisor, who sets his goal and builds up a financial plan based on which he uses a range of products keeping the risk profile and the income needs of the customer to draw a set of multiple allocations of customer’s money. A reason for an Asset Management Company (AMC) to launch a product is to ensure that it is present in all the categories. Another reason is to launch products in the thematic funds category, where based on some government initiatives, certain sectors are likely to benefit. And this is presented to the investor as a gilded opportunity. We launched a Services Fund about 18 months ago. While the services sector’s contribution to GDP was 54%, its share in the stock market share was only 36%. We felt this gap can be addressed with our thematic fund. We have delivered returns of well over 25% on this since our launch. It has already delivered two dividends in the space of 15 months. We initially had 60,000 applications and since then there has been another 25,000 applications. So, we have 85,000 customers.

We have 90 offices including those in Gujarat, UP and Punjab. We are setting up and building a strong foundation in these regions. Though banking concentration is high, MF penetration has been low in these regions. There are still growth opportunities in the South and our market share can further improve in this region. Over the last 15 years, we have built a reputation for being a niche player in the mid and small caps categories, where we have close to 10% market share. We have built a good brand in the toughest part of the market, the mid caps. Now, the effort is focused on building our brand in the large caps. Our concentrated large cap fund and one of our multi cap funds – large and mid-cap – are already 5-star rated. Over the next three years, our strategy is to scale in the large and multi cap funds. I envision Sundaram Equity fund to be the flagship doing large caps and multi caps, besides the mid-caps.