Strongest earnings growth now concentrated outside Top 100 stocks, mid- and small-caps lead

Sundaram Mutual has entered the specialised investment fund (SIF) segment with the Select Equity Ex-Top 100 Long-Short Fund, an actively managed strategy investing predominantly in mid- and small-cap companies outside India's 100 largest listed firms. The new fund offer opened on October 21 and closes on November 4, with Sundaram targeting collections of Rs 350 crore, according to the company.

The fund will invest mainly in companies ranked 101 to 750 by market capitalisation, holding a concentrated portfolio of 25 to 40 stocks. It may allocate 65-100% of its portfolio to equity and equity-related securities, including permitted short exposure, and may hold up to 35% in debt and money-market instruments. Short positions will be taken through derivatives, with unhedged short exposure capped at 25% of the portfolio in line with SEBI's SIF framework. Ramu said derivatives will be used mainly for yield enhancement, temporary hedging of long positions and pair trades, with outright naked shorts in individual stocks expected to be rare given limited liquidity and the short tenure of single-stock derivative contracts in India.

Madanagopal Ramu, fund manager, equity at Sundaram Asset Management, said the strategy rests on an observation that earnings momentum is currently stronger outside the large-cap universe. He linked this to a broadening capital expenditure cycle, noting that AI-related spending is extending from software into hardware and power infrastructure globally. In India, capital goods output has grown in the high teens for nearly 10 consecutive months, and capex, which had fallen below GDP growth during the pandemic, is now growing at roughly 2.5 times the pace of GDP expansion. Ramu also cited credit data, saying India is one of only three countries, alongside Indonesia and Vietnam, recording double-digit credit growth, with systemic credit growth at 15-18%.

Ramu acknowledged that valuations across parts of the mid- and small-cap segment remain elevated, which he cited as the reason for running a concentrated portfolio rather than replicating the broader market. Preferred areas include manufacturing and capital goods, non-banking financial companies participating in the formalisation of credit, and discretionary or premium consumption businesses. He noted that foreign portfolio investors have been net sellers of Indian equities, though their continued investment in Indian startups suggested global capital remains constructive on medium-term growth.

Sundaram CEO and managing director Anand Radhakrishnan said the firm chose a long-short equity strategy over a more conservative yield- or arbitrage-oriented offering to establish an early presence in the SIF category. He argued that a long-only fund is essentially an index combined with a long-short overlay, and that the product is designed to isolate the alpha component. Sundaram also positions the SIF structure as offering mutual fund taxation while retaining some flexibility associated with alternative investment products, which it argues gives an advantage over portfolio management services, where tax drag can become material over longer holding periods.