Sundaram Equity Savings Fund (SESF) has been among the better-performing funds in the equity savings category, delivering strong risk-adjusted returns over the long term. It has generated a compounded annual return of 9 per cent over the past seven years.
Equity Savings Funds invest across three avenues — equities, debt and arbitrage — with each typically accounting for about 30–35 per cent of the portfolio. By combining direct equity and arbitrage exposure, these funds maintain more than 65 per cent exposure to equity and equity-related instruments, allowing them to qualify for equity taxation. This makes them attractive to conservative investors seeking potentially better returns than fixed-income investments without taking on the full risk of an equity fund.
The Rs 1,032 crore AUM fund can be considered by conservative investors seeking a relatively stable hybrid allocation with some equity upside over a two- to four-year investment horizon. The fund’s valuation-based asset-allocation approach and strong long-term performance support our positive stance, despite its below-average performance over the past year.
Asset allocation
SESF determines its equity-debt allocation using a dual-parameter valuation model based on the trailing 12-month Price-to-Book (PB) and Price-to-Earnings (PE) ratios of the BSE 200 index, with a 50 per cent weight assigned to each. The equity allocation is inversely linked to market valuations: when valuations are elevated, the equity allocation is reduced and debt exposure increased, and vice versa.
The fund’s net equity allocation can range from 15 per cent to 40 per cent of overall assets under current regulations. However, it typically operates within a 30–40 per cent range. It is also among the few funds in the category that can take its combined hedged and unhedged equity exposure up to 82 per cent. Its debt allocation is relatively low and can fall to as little as 10 per cent of overall assets.
Equity
The fund’s stock-selection approach rests on four key pillars: supportive enablers such as favourable policy and regulatory conditions; management quality and proven execution capabilities; strong business fundamentals, assessed through competitive moats and Porter’s Five Forces; and valuations that provide a prudent entry point.
The fund has recalibrated its market-cap allocation this financial year. Large-cap exposure has declined from 70–80 per cent last year to 60–70 per cent of the equity portfolio, while small-cap exposure has increased from about 5 per cent to around 20 per cent. Mid-cap exposure has remained broadly stable at 15–20 per cent of equity portion.
The shift followed the sharp correction in March, which improved the risk-reward profile of select small-cap stocks. The fund manager expects small-cap earnings to grow by 25–26 per cent, compared with 14–15 per cent for large caps. The equity allocation is reviewed monthly, although large caps are expected to account for at least 60 per cent of the equity portfolio.
Within BFSI, the fund is overweight NBFCs and capital-market companies, while remaining underweight banks and insurance companies. It is also overweight automobiles, infrastructure, telecom and new-age technology or platform companies. Within IT, the fund prefers mid- and small-cap companies over large-cap IT stocks.
Conversely, the fund is underweight FMCG and retail, utilities and power, banks, and oil and gas.
Banks, telecom services and petroleum products were the top sectors in the equity portfolio. Over the past year, the fund increased its allocation to banks, financial technology and agricultural, food and other products, while reducing exposure to IT software, FMCG and petroleum products.
Arbitrage
The arbitrage allocation is driven by prevailing market spreads. Attractive spreads prompt the fund to increase its arbitrage exposure, while weaker spreads keep the allocation closer to the minimum. In the latest portfolio, as of July 2026, long equity exposure stood at 81 per cent, while net equity exposure was 37 per cent, implying an arbitrage allocation of about 44 per cent.
Debt
On the debt side, the fund follows an accrual-oriented strategy and avoids taking excessive duration risk. It focuses on short-term government securities, money-market instruments and AAA-rated corporate debt.
Its corporate debt exposure includes highly rated issuers such as LIC Housing Finance, NABARD and SIDBI. Over the past five years, the Macaulay duration of the debt portfolio has ranged between 0.4 and 3.6 years.
Performance
The fund delivered below-average returns over the past year. Its underperformance was primarily attributable to its relatively higher large-cap exposure, while several peers had greater allocations to mid- and small-cap stocks. Weak performance among large caps, particularly HDFC Bank, also weighed on returns. The fund’s relatively lower debt allocation was another factor that affected performance.
However, its long-term track record remains strong. Over the past seven years, its five-year rolling returns averaged 12 per cent CAGR, compared with 9.7 per cent for the category. During this period, its five-year rolling returns ranged from 8.4 per cent to 16 per cent.
On a three-year rolling-return basis, the fund delivered a CAGR of 11.8 per cent, compared with 9.6 per cent for the category average.
The regular plan has a base expense ratio of 1.92 per cent, higher than the category average of 1.48 per cent. The direct plan’s expense ratio is 0.65 per cent, marginally higher than the category average of 0.62 per cent.
Published on August 29, 2026