Citywire AA-rated Desai said he had taken profit on a number of corporate banks and put the money to work in small financial banks.
These are ones focused on extending credit to smaller Indian cities and providing credit to micro businesses, he told Citywire Selector.
'Around 500 million people are in these areas and this has traditionally been an area which the state-owned banks have avoided because the ticket sizes of those loans are small,' Desai said.
'Typically private banks have also avoided these because they have favoured the more metro areas, such as the major cities. Now what we are finding is there is a huge appetite for the credit micro businesses need to expand.'
Desai has 28% of the fund devoted to financials, with 8% allocated to insurance companies, while small financial banks make up 6% of the fund.
'There are some small finance banks that we have identified that have the scale to make the business model viable. One of the companies that we have been investing in is Equitas.
'It lends out to first time users of credit and also to micro and small businesses. I think that is quite a profitable area to be looking at,' he added.
At a macro level, Desai said some firms had announced weaker earnings this quarter as a result of the Goods and Services Tax (GST), which was in July 2017.
Desai said it was a short-term issue, as retailers wanted to hold no stock, which would have been taxed at a higher rated at the time GST was introduced.
‘This has had a negative impact on a number of the companies who are further upstream selling down into retailers because the actual demand for their products waned as a result of this zero inventory policy,’ Desai said.
‘As the monsoon finishes and with the Diwali period on the horizon, what we expect is retailers to build up their inventory, which will be a surprise in terms of earnings recovery.'
Over three years to the end of July 2017, the Neptune India fund returned 49.42% in Indian rupee terms. The compares to a rise of 35.34% by its Citywire-assigned benchmark, the Nifty TRI, over the same time frame.