Sundaram Services Fund: Opportunity to invest in the booming services sector

Services Sector is one of the most attractive sectors for equity investors in India. Service sector growth in India is led by rising purchasing power, fast growth in social mobility and increasing urbanization needs. Over and above this, outsourcing by foreign companies in the business services, BPO and IT services segment have given Services sector in India a tremendous boost. India ranks 7^th in overall GDP (2018) and is among the top 2 in Services GDP growth @7.4%.

The Services sector is not only the dominant sector in India’s GDP, but has also attracted significant foreign investment flows and contributed significantly to exports while providing large-scale employment. India’s services sector covers a wide variety of activities such as – Business and financial services, trade, tourism and hospitality, transportation, healthcare and services associated with media, gaming, data providers and online services etc.

As of 2018, 31.45 per cent of India’s employed population is working in the services sector (Source: IBEF.org)

How big is the Services sector market?

The services sector is the key driver of India’s economic growth. The sector has contributed 54.17 per cent of India’s Gross Value Added at current price in 2018-19*. India’s services sector GVA grew at a CAGR of 6.96 per cent to US$ 1,356.49 billion in FY19* from US$ 846.84 billion in FY12. Net export estimate from April to November 2019 in services is US$ 142.02 billion and import is US$ 89.24 billion.

Services sector is the largest recipient of FDI in India with inflows of US$ 74.94 billion between April 2000 and June 2019 - (*Source: IBEF.org)

Why India is and will be the most attractive Services sector story in the world

• The growth story of India is fascinating. From the 1950s to 1980s, India was a planned economy and our GDP growth rate was low, less than 4% per annum. India’s GDP after around 40 years of Independence was of $300 billion in 1990. In the next 20 years, India’s GDP grew to $1.4 trillion – nearly 4 times of what was achieved in the first 40 years in half the time. India took around 60 years (since Independence) to enter the elite trillion dollar Gross Domestic Product club - it took only 8 years from 2007-08 to double the size by 2016. The economy of India is characterised as a developing market economy. The long-term growth perspective of the Indian economy remains positive due to its young population and corresponding low dependency ratio, healthy savings and investment rates.


• Soon more than half (50%) of our population will be below the age of 25, whereas in the US and China only around 31% of the population is below the age of 25. This demographic advantage can pay rich dividends since a large and growing working population can accelerate our GDP growth. A growing young population, therefore, is positive for the Services sectors.


• The Government of India recognises the importance of promoting growth in services sectors and provides several incentives in various sectors such as health care, tourism, education, engineering, communications, transportation, information technology, banking, finance, management, among others.


• India’s earnings from medical tourism could exceed US$ 9 billion by 2020. By 2023, healthcare industry is expected to reach US$ 132 billion.


• India’s digital economy is estimated to reach US$ 1 trillion by 2025


• Services sector is the largest recipient of FDI in India with inflows of US$ 74.94 billion between April 2000 and June 2019


• By end of 2023, India’s IT and business services sector is expected to reach US$ 14.3


• The implementation of the Goods and Services Tax (GST) has created a common national market and reduced the overall tax burden on goods. It is expected to reduce costs in the long run on account of availability of GST input credit, which will result in the reduction in prices of services.
  
  (Data source: IBEF.org, ceicdata.com, Economic Times and tradingeconomics.com)

About Sundaram Services Fund

Sundaram Services Fund is the first and only mutual fund scheme in India which aims to capture the potential growth in the Services sector by investing in the below segments –

According to Sundaram Mutual Fund, the above segments have 193+ companies that are engaged in services with a total market capitalization of Rs 41.20 Lakh Crore+. Out of these, there are 31 large cap companies, 40 mid cap companies and 122 Small Cap companies with aggregate market cap of INR 30.6 Lakh Crore, 6.6 Lakh Crore and 4.0 Lakh Crores respectively.

Investment Strategy of the Fund

The investment manager identifies opportunities through continuous research across sectors and companies. Analysis focuses on the past performance and future prospects of the company, business prospects, financial health, competitive edge, managerial quality and practices, minority shareholder interests and transparency. In selecting particular companies for investment, emphasis is given to those companies that operate in the services sector.

Portfolio Construction

The Sundaram Services Fund has a large cap bias. A little more than 50% of the fund’s assets are invested in large cap companies. The fund has a higher allocation of 25% in small cap companies and around 18% is in midcap companies. From a sector perspective, the fund manager has deployed over 50% of the assets in banking, finance, retailing and hospitality sectors. In terms of company concentration, the portfolio is well diversified with its top 5 holdings, HDFC Bank, ICICI Bank, Reliance Industries, Bharti Airtel and SBI Life Insurance contributing to around 28% of the total portfolio.

Source: Advisorkhoj Research

Fund Overview

Sundaram Services Fund was launched in September 2018 and has Rs 1,304 Crores of assets under management (AUM) as on 31^th January 2020. The expense ratio of this fund is 2.41% for the regular plan. S&P BSE 200 (TRI) is the Benchmark of the Fund. The fund charges 1% of exit load if redeemed with 12 months from the date of investment.

Sundaram Mutual Fund CIO, S. Krishnakumar, Mr. Rahul Baijal and Mr. Rohit Seksaria are the fund managers of this scheme.

Fund Performance

(Data as on 31st January 2020)

As you can see the fund has beaten the Benchmark and additional Benchmarks returns with good margin and the outperformance is significant in the last 1 year as well as in the since inception period.

Lump Sum Returns

Rs 1 lakh lump sum investment in the Sundaram Services Fund (regular - growth option) would have grown to value of over Rs 1.34 Lakhs (as on February 24 2020) – approximately in 17 month’s time. The chart below shows the growth of Rs 1 lakh investment in the scheme since inception (21^st September 2018) versus the Benchmark and Additional Benchmark. The scheme has given over 34% absolute returns in this period.

Source: Advisorkhoj Research

Conclusion

In this blog post, we discussed about the potential of Services sector in India. Sundaram Services Fund is helmed by one of the best fund management teams in the country. Sundaram Mutual Fund as an AMC has an outstanding performance track record of managing thematic / sector and mid & small cap funds.

The Services sector in India looks very promising and Sundaram Services Fund is likely to capitalize on this theme basis the track record of the fund managers and the AMC. It should inspire confidence in investors who have moderately high to high risk taking appetite and ready to reap rich rewards in the long run by investing in the first and only fund focused on the Services sector in India. However, investing in Sector/ thematic funds carries high risk and may not be part of your core mutual fund portfolio. Investors can have 10-15% of their total portfolios exposure on these kinds of funds provided they understand the risk associated with these funds. Investors should consult with their financial advisors, if Sundaram Services Fund is suitable for their investment needs.