Sundaram Rural India Fund: Great returns from Rural India themed mutual fund

The importance of rural India in the political and economic context of our country can never be overstated. The rural economy has always been a priority area for governments both in the centre and in the states since our independence. A good part of the Union Budget every year is allocated to initiatives in the rural sector. Since India is largely a domestic consumption driven economy, rural consumption will play a very important role in the India growth story since rural consumption accounts for 55% of our total private consumption.

In this article we will review Sundaram Rural India Fund, a thematic fund focused on the rural development in India. The fund was launched in 2006 with the objective of generating consistent long term returns by investing in companies benefiting from rural India's transition. From 2010 to 2014, the rural consumption theme played out very well in terms of investment returns for this fund. Over this period Sundaram Rural India Fund gave 82% returns.

Over the last three years, the fund has given more than 20% annualized returns, even though rural consumption has been subdued during this period. The fund has Rs 1,604 Crores of assets under management (up more than 100% in the last 18 months or so). The expense ratio of the fund is 2.42%. S. Krishna Kumar and Shiv Chanani Agarwal are the fund managers of Sundaram Rural India Fund.

The chart below shows the three year rolling returns of the fund versus BSE – 500 since inception. We have chosen a three rolling return period because one should have a long investment horizon for this fund. You can see in the chart below that after an initial period of underperformance, Sundaram Rural India Fund has been consistently outperforming the benchmark from 2009 onwards. Also you can see in the chart below that, except the bear market period of 2011, the performance differential between the fund and the benchmark is fairly stable. This is usually the hallmark of prudent and consistent approach to fund management.

Source: Advisorkhoj Rolling Returns

The chart below shows the 3 year rolling returns of Sundaram Rural India Fund versus the thematic funds category over the last 5 years.

Source: Advisorkhoj Rolling Returns

The chart above demonstrates why Rural India is a powerful theme. The maximum three year rolling return in the last 5 years was 33.6%, while the minimum three year rolling return in the last 5 years was 12.8%. The average 3 year rolling return over the last 5 years was 23.3%, while the median 3 year rolling return over the last 5 years was 24.2%. The 3 year annualized rolling returns of the fund was 20% or above, more than 70% of the times in the last 5 years. This is outstanding performance.

Portfolio Construction

Some investors tend to associate consumption only with consumer non-durables or fast moving consumer goods (FMCG). Sundaram Rural India Fund has a balanced sector allocation between defensive and cyclical sectors. While FMCG gets the highest sector allocation in this fund, there are significant allocations to other sectors like Automobiles, pesticides, fertilizers, cement, non-banking finance companies (NBFCs), chemicals, cement etc.

Rural demand has been under pressure for the last 2 – 3 years, mainly because of consecutive years of deficient monsoon and relative MSP (minimum support price hikes). The MSP hike for Kharif crops this year (2017 - 18) is higher than last year, though some investment experts feel that the hikes are still modest, given the economic distress that farmers are facing in many states.

However, rural consumption is a structural story, both in terms of growth and nature. The Government’s objective of doubling farm income in next 5 years, the PM crop insurance, implementation of 7^th pay commission which has many rural beneficiaries and farm loan waiver will improve rural demand. The outlook of consumption growth in rural India in the medium to long term is very positive. Hence, we can expect Sundaram Rural India Fund to deliver excellent performance in the future.

In terms of company concentration the fund is well diversified, where the top 5 holdings, Mahindra and Mahindra, Hindustan Unilever, ITC, Britannia and Asian Paints accounting for less than 24% of the portfolio value.

Source: Advisorkhoj Research

Performance

The chart below shows the annual returns of Sundaram Rural India Fund over the last 5 years. We can see that the fund outperformed average category returns of thematic equity funds on a fairly consistent basis.

Source: Advisorkhoj Research

The chart below shows the NAV movement of Sundaram Rural India Fund versus the benchmark over the last 5 years. The orange line shows the NAV movement of the fund and the gray line shows the NAV movement of the benchmark index, BSE – 500. The blue line below shows the Benchmark movement of the fund over the last 5 years.

Source: Advisorkhoj Research

The chart below shows the returns of monthly SIP of Rs 5,000 in Sundaram Rural India Fund (Growth Option) over the past 5 years. The orange line shows the investment values of the SIP over the past 5 years. With a monthly SIP of Rs 5,000 in Sundaram Rural India Fund (Growth Option), you could have accumulated a corpus of nearly Rs 5.7 Lakhs with an investment of just around Rs 3 Lakhs. The annualized SIP returns (XIRR) of this fund over the last 5 years was 25.5%.

Source: Advisorkhoj Research

The chart below shows the growth of Rs 1 Lakh lump sum investment in Sundaram Rural India Fund (Growth Option) over the past 5 years.

Source: Advisorkhoj Research

You can see that, Rs 1 Lakh lump sum investment in the fund grew to around Rs 2.8 lakhs in the last 5 years. The CAGR (annualized return) over this period was nearly 23%.

Conclusion

In our earlier articles on thematic funds, we had discussed that these funds should be positioned properly in your investment portfolio. As such, these funds should not form the core of your investment portfolio, but allocation to certain themes can enhance your overall portfolio returns. Investors should understand the difference between sector funds and thematic funds; while sector funds invest in a particular sector, thematic funds can invest in multiple sectors which are in the ambit of the theme.

The other misconception with regards to thematic funds is that, you have to always time your entry and exit from a thematic fund. Again this is a sweeping generalization and does not apply to all themes. Sundaram Rural India Fund is based on theme of rural development, which is an important component of the long term secular India Growth Story. The rural development theme will both be a driver and a beneficiary of industrial and economic growth of India.

As such, you should have a long investment horizon for Sundaram Rural India Fund, since the rural India growth story will play out over a long period and has the potential to generate excellent returns for investors in the long term. Investors should consult with their financial advisors if Sundaram Rural India Fund is suitable for their investment portfolios.