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Economy Poised to Grow at 7%

Harsha Viji, Managing Director, Sundaram Mutual tells us why it's possible for equity markets to deliver 15-20 per cent in the next 2-3 years

A new government in place and an economy that is poised to grow at about 7 per cent are some of the things that Harsha Viji, Managing Director, Sundaram Mutual stresses on in this interview, where he tells why it's possible for equity markets to deliver 15-20 per cent in the next 2-3 years.

Election results have elevated the markets, what is likely to happen to the markets over the next 1-2 years?
In this environment, Mid-cap & Small cap shares will outperform. The growth in the Indian economy has now bottomed out. From a broader market perspective, the benefit from a stable government, a leader with a strong execution track record and a focus on faster infrastructure will be the foundations for growth. This will include finding ways to funding in infrastructure including FDI and FII. For many small and mid-cap companies, their earnings are low compared to previous cyclical peaks; this combined with their financial and operating leverage can lead to rapid earnings growth in many cases. In the next 2-3 years, we believe that the Indian economy is poised to grow and will have a growth trajectory of about 7 per cent. This will translate to one's earnings growth of 16 per cent plus over four years. Current valuations are broadly reasonable and in-line with long term averages and in this scenario we believe Indian equity markets will deliver 15-20 per cent over the next 2-3 years.

Despite strong equity markets, many of your equity funds are still lagging in performance; how do you plan to position them in the current market scenario?
I take exception to this. It is factually not true. Our flagship fund Sundaram Select Midcap on a 10-year systematic investment plan (SIP) basis is the topmost equity fund in the entire industry. It has beaten its benchmark consistently over 12 years, despite being managed by multiple fund managers. Our SMILE fund which focuses on small & midcap has delivered one year return of 100 per cent and has beaten the benchmark in 5 out of 6 years. Our close ended micro-caps launched earlier this year have also demonstrated best in class performance, some declaring dividends months after launch.

All our diversified equity funds are beating benchmark on a one year basis and we have recently declared 10 dividends in the last 6 months covering over 60 per cent of our investors. Our portfolio management returns are also consistently among the best in the industry.

You have been aggressive in launching hybrid funds, but how do you plan to manage your debt funds in a situation where interest rates are likely to come off from current levels?
Debt fund investors like any other asset class, look for accrued income and capital gains and look to us to manage the funds within a clear strategy and mandate. Within this we try to maximise returns. With performance, our debt funds have grown from an AUM of ₹2,500 crore a few years ago to ₹13,000 crore today. Our Liquid and Liquid Plus funds figure consistently in the top quartile versus peers and serve almost all the top names in corporate India.

Given the current situation in the MF industry, what will be your key business strategy?
As I said, we have a long term commitment to the business and all our investors. There are a number of initiatives in the works. We have set up a subsidiary AMC in Singapore that has launched its first midcap fund and will continue to grow. We are expanding our branch network to 100 by year end and will continue the expansion to reach the retail investors. We have the advantage of having an R & T agent within the group and will continue to work closely with them and improve service levels to distributors and investors. We have reached ₹20,000 crores in AUM and we are setting our sights at ₹25,000 crore in AUM.

What is your view on the industry where top players are garnering the lion's share of money while small fund houses are struggling?
It is a very competitive market and a portfolio based primarily on fixed income is not viable economically. We have concentrated on equity and now have a big retail base of equity investors in SIP. Growth for growth's sake was never a criteria and we have never done a deal at a loss. We have made profits every year from 1996 to date.

We have a long term commitment to the market and despite being outside the top 10 in ranking, we are growing at a healthy pace. However, smaller AMCs are reconsidering their business models and are looking for partners or looking for mergers and acquisitions. We have been approached several times, but that is not something we are looking at strategically.

Will the recent changes to tax treatment on non-equity mutual funds impact your business?
The tax changes are likely to impact the industry in the near term in a limited way. Investors and the industry will realise that the tax efficient returns are possible only on a increased investment pricing. Investors who are constrained by cash flows will be able to deploy in liquid and liquid plus schemes which still deliver superior returns than bank fixed deposits and offer portfolio diversification and easy liquidity. Despite these changes, the industry will continue to grow.