Sundaram Small Cap Fund: 17 times wealth creation in last 18 years

Small cap funds have been in a rage among retail investors this year. In each of the months of the first quarter of this financial (FY 2023-24), small cap funds attracted the largest net inflows among all actively managed equity mutual fund categories. In April, May and June, small cap funds got net inflows Rs 2,182 crores, Rs 3,282 crores and Rs 5,471 crores respectively. Small cap inflows constituted nearly 60% of net inflows of actively managed equity fund categories (source: AMFI monthly data, April, May and June 2023). In wake of the huge inflows small cap funds are declining new lump sum investments. In this article, we will review one of the biggest wealth creators among small cap funds, Sundaram Small Cap Fund. Investors should note that Sundaram Small Cap Fund is accepting lump sum investments.

If you invested Rs 1 lakh in the scheme at the time of its launch in 2005, the value of your investment would have multiplied 17 times in the last 18 years. The investment value of your Rs 1 lakh investment would be Rs 17.4 lakhs as on 18^th July 2023. The compounded annual growth rate (CAGR) of investment of the scheme since inception is nearly 17%.

Source: Advisorkhoj Research

About the scheme

Sundaram Small Cap was launched in February 2005 and has Rs 2,342 crores of assets under management (AUM) as on 30^th June 2023. The expense ratio of the scheme is 2.05%. The portfolio turnover ratio of the scheme is only 22%, which shows that fund managers follow largely a buy and hold strategy. After the acquisition of Principal Asset Management Company (AMC) by Sundaram MF, the erstwhile Principal Small Cap Fund was merged with Sundaram Small Cap Fund. Mr Ravi Gopalakrishnan and Mr Rohit Seksaria are the fund managers of this scheme.

Wealth creation through SIP

We have often discussed in our blog that Systematic Investment Plan (SIP) is an excellent mode of investment in high volatility equity products like small cap or midcap funds. Through SIPs you can take advantage of volatility through Rupee Cost Averaging. The table below shows how much money would have accumulated over different periods (as on 18^th July 2023), if you invested Rs 10,000 every month through Systematic Investment Plan in Sundaram Small Cap Funds. You can see that you could have created substantial amounts of wealth by investing in this scheme through SIP over long investment tenures.

Source: Advisorkhoj Top Performing Systematic Investment Plan - Equity: Small Cap

Rolling Returns

The chart below shows the 5 year rolling returns of Sundaram Small Cap Fund versus its benchmark index Nifty Small Cap 250 TRI since the inception of the scheme. You can see that across different market conditions, the scheme has outperformed the category average most of the times over 5 year investment tenures. The scheme underperformed recently from 2020 to 2022, but has since then bounced back in performance.

Source: Advisorkhoj Rolling Returns Calculator

Downside risk limitation

The table below shows the performance of Sundaram Small Cap Fund versus its benchmark index, Nifty Small Cap 250 TRI in various large drawdowns. You can see that in most major drawdowns the scheme was able to limit downside risks for investors.

Source: Advisorkhoj Research

Investment Strategy

• Stock selection is bottom-up using in-house research


• Business Dynamics: Size of the opportunity, Scalability of business, entry barriers, market share changes, sustainability and longevity of the competitive edge


• Operating Matrix: Skill versus Luck


• Skill: Operational efficiencies, Scale of Operation, Technology and Innovation & Value Migration;


• Luck: Raw material prices, Inventory valuation, Fuel price change and temporary disruption with competitors


• Profitability: Markets ascribe a premium only to companies with quality and sustainability of profits


• Quality of Growth: Reflected in ROE & ROCE


• Capital Allocation: Capital Expenditure is a certainty while revenue and profits are an illusion


• Valuation: It is important to “price the value and not value the price”

What are the main investment themes for Sundaram Small Cap Fund?

• Themes: Themes which can sustain growth multi fold over a next 5-7 years


• Growth: Companies which can sustain industry leading growth across economic cycles


• Leaders: Business that can sustain their leadership either in market share or cost over long periods.

Current portfolio construction

• Diverse portfolio with over-weights across capital goods, consumer discretionary and healthcare. Underweight in global commodities. Bottom-up stock selection remains core to the strategy


• Recent portfolio action is centered on stock-specific profit booking in consumer discretionary and gradual sizing up of bets in specific manufacturing companies.


• Medium-term view remains constructive on domestic manufacturing sectors such as auto ancillaries and industrials. Changing global supply-chain dynamics, improved capabilities of domestic companies along with Government’s thrust on PLI schemes provide a reasonably good growth runway.


• The current market cap allocation to large caps is in view of expected volatility over the short term. This allocation can change to higher small caps depending on valuations and outlook.


• Currently overweight on sectors aligned towards impending domestic economic recovery

Why invest in Sundaram Small Cap Fund?

• Indian equities has made broad based recovery after initial months of volatility in 2023


• Indian economy is in a structural up cycle which will come to fore as global macroeconomic challenges recede over next few quarters. Corporate and bank balance sheets are now in best possible shape to drive capex and credit respectively. The earnings growth / Valuation expectations context is turning more and more favorable.


• Small caps are integral to the India growth story. Large cap stocks are concentrated in only a few industry sectors. Large cap stocks do not have presence in many sectors. Sectors like chemicals, packaging, sugar and tea, ceramics and sanitary ware, hotels, logistics, construction, textiles, apparels, luxury goods, healthcare, application software are primarily in the small cap market cap segment. These sectors are likely beneficiaries of a number of policy reforms enacted by the Government and have a great potential in the consumption driven India growth story.


• Sundaram MF as an AMC has a strong long term track record of performance in the small and midcap market capitalization segments.


• Sundaram small cap fund has an 18 plus year track record of wealth creation. The fund managers have track record of managing top performing schemes like Sundaram Large and Midcap Fund, Sundaram Balanced Advantage Fund, Sundaram Equity Savings Fund and Sundaram Global Brands Funds.

Who should invest in Sundaram Small Cap Fund?

• Investors looking for capital appreciation over long investment tenures


• Investors with high risk appetites


• Investors with minimum 5 year investment tenures


• We think that SIP is the best mode of investment small cap funds over long investment horizons.


• However, investors can also take advantage of deep corrections to tactically invest in lump sum.


• You can also invest in this fund through 3 – 6 months STP from Sundaram Liquid Fund.

Investors should consult with their financial advisors if Sundaram Small Cap Fund is suitable for their investment needs.