All about Sundaram Rural India Fund

The primary investment objective of the scheme is to generate consistent long-term returns by investing predominantly in equity & equity related instruments of "companies that are focusing on Rural India".
*Source: Offer document

Sundaram Rural India Fund (SRIF) works on the premise that the next round of growth in India will come from the rural areas. In many ways, the spending/consumption and infrastructure boom that is on display at present, will also embrace rural India. In effect, the rural sector has as much to benefit from growth in infrastructure and consumption as the urban sector.

Another driver for growth in the rural sector is enhanced budgetary allocations. In the latest budget, the Finance Minister marked rural electrification, housing, credit and infrastructure for special mention as also allocations. Without doubt, this will give a fillip to the rural economy in the years to come.

Having said that, investors must appreciate that although the rural economy is looking to give the urban economy a run for its money, there aren't enough exclusively "rural" listed stocks in the country. So any mutual fund that targets the rural economy for growth has a very limited investment universe. It is more likely to invest in stocks that have a presence in the rural segment with the potential to grow going forward.

SRIF is no exception. It will invest predominantly in stocks that will gain in some way due to the growth potential of the rural sector. To that end, it is like any other diversified equity fund that invests across stocks/sectors, only that the stock/sector must have a 'rural flavour'. Investors must consider that equity funds from Sundaram Mutual Fund are managed with a process-driven investment style. So SRIF is likely to draw from Sundaram Mutual Fund's disciplined approach to investing.

Having understood this, investors will appreciate that most diversified equity funds invest in stocks/sectors that offer above-average growth opportunities; and since growth in rural consumption is on an uptrend, stocks of companies catering to this section of the population already find a place in several mutual fund schemes.

Also considering that there aren't enough 'exclusively rural' stocks in the country, it is difficult to create a diversified portfolio of stocks that is very different from that of a regular diversified equity fund without a rural bias. Given these factors, we believe that investors are better off investing in well-established diversified equity funds like Sundaram Growth, HDFC Equity Fund and HDFC Top 200 that have a track record of identifying high growth sectors early on.

In terms of sectors, it will invest in manufacturing (auto, cement and engineering among other sectors) as well as services like banking and software education.

In terms of number of stocks, the indication we have received is that the fund may not be able to diversify as much as it would like, given the limited number of stocks that meet its criterion. According to investment guidelines pursued by Sundaram Mutual Fund, there is a 5% investment ceiling on a stock in the portfolio. It is likely that this 'unwritten' norm may not be applicable to SRIF since it has a limited investment universe.

SRIF's fortunes will be linked to those of the rural economy. There is little doubt that the stock of Rural India, which is already on the upswing, is set to rise even further. Enhanced focus and budgetary spending in rural industries will undoubtedly propel the rural economy, increase disposable income and fuel consumption. Companies that have well-established operations in the rural sector will ride the benefit of rural prosperity.

However, the rural economy in India is still very closely linked to the monsoon. Lack of proper irrigation facilities puts a lot of pressure on the monsoons to deliver year on year. Any setback on that front is likely to put a dampner on growth at least with respect to that year. This will take its toll on SRIF's performance.

Given that a thematic rural fund poses above-average risk due to its restricted nature, we believe that investor's interests are better served by investing in well-managed diversified equity funds as opposed to a rural fund.

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