Recently the markets corrected, several fund houses saw this as an opportunity to invest in the beaten down small cap space. As the small-cap stocks provide an opportunity to buy stocks at moderate pricing and have the potential to generate returns over the long term. Principal Small Cap Fund (PSCF), launched by Principal Mutual Fund, is another fund to join the bandwagon of the recently launched funds that will invest primarily in stocks of companies falling under the small-cap category.

PSCF is an open-ended equity scheme launched with the belief that the small caps have the potential to grow exponentially. The fund house states in its presentation that the small caps consist of many untapped sectors like the Chemicals, Ceramics & Sanitaryware, Hotels, Logistics, Construction, Sugar and Tea and Packaging to name a few.

As per the SEBI classification of the market capitalisation of stocks, small-cap companies are those that fall in the list that starts from 251st onwards in terms of full market capitalization. As per SEBI mandate, Small-cap equity funds should invest at least 65% of their assets in companies below the top 250 by market capitalisation.

Hence, PSCF will invest as per the given mandate and may also invest up to 35% of its total asset in equity and equity-related instruments of companies other than small caps.

However, note that small-cap stocks, due to their size, usually, have a low trading volume and are less liquid. Thus, the risk associated with small-cap funds is greater than mid-cap funds.  So, to mitigate the market risk for the investors PSCF provides an option to stagger the investments through Smart Trigger Enabled Plan (STEP) facility and Auto Trigger Facility to book profits.

Image1: How STEP Works?

(Source: Principal Small Cap Fund Presentation)

The STEP facility basically helps to facilitate the investors to take advantage of the downfall in the Index i.e. Nifty Small Cap 100. In a scenario when the market corrects to 3% or more on a cumulative basis from the date of Allotment, the investments will be moved from Principal Cash Management Fund to Principal Small Cap Fund.  This is for reducing the market timing related risk for the investors.

Whereas in Auto Trigger facility an investor can book profits by mentioning specific the rate of return to redeem units. When the fund crosses the mentioned rate (trigger) the Fund will automatically redeem and/or switch the units on behalf of the investors on the date of the happening of the event.  A trigger will activate a transaction/alert when the event selected for, has reached a value greater or less than the specified value (trigger point).

(Source: Principal Small Cap Fund Leaflet)

Table 1: NFO details

Type An Open-ended Equity scheme Category Small-cap Funds
Investment Objective To generate long term capital appreciation by predominantly investing in equity and equity related instruments of small cap companies. However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans  • Direct

• Regular
Options • Growth*

• Dividend (Pay-out and Reinvestment)

*Default option

 # Default option for Dividend
Entry Load Nil Exit Load
  • If redeemed/ switched on or before 1 year from the date of allotment: – Nil for redemption/ switch out of units up to 25% of the units allotted (the limit)
  • 1% on redemption in excess of 25% of the limit stated above- Redemption of units would be done on First in First out Basis (FIFO)
  • Nil thereafter
Fund Manager Mr P.V.K. Mohan and Mr Siddarth Mohta Benchmark Index Nifty Small cap 100 Index
Issue Opens April 22, 2019 Issue Closes: May 06, 2019

(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, the scheme’s asset allocation will be as under:

Table 2: PSCF’s Asset Allocation

Instruments Indicative Allocation (% of Net Assets) Risk Profile
Equity and Equity-related Instruments of Small cap companies* 65 100 High
Equity and Equity-related Instruments of companies other than Small cap companies 0 35 High
Debt and Money Market Instruments including units of debt & liquid schemes 0 35 Low to Medium

* The fund will predominantly invest in small-cap stocks. In terms of SEBI circular SEBI/ HO/ IMD/ DF3/ CIR/ P/ 2017/ 114 dated October 6, 2017, the universe of “Small Cap” shall consist of 251st company onwards in terms of full market capitalization and that the Scheme will be required to adhere the following:

  • The list of stocks of Small Cap companies prepared by AMFI in this regard will be adopted.
  • The said list would be uploaded on the AMFI website and would be updated periodically as specified by SEBI.
  • Subsequent to any updation in the said list as uploaded by AMFI, the portfolio of the Scheme will be rebalanced within a period of one month.

This market cap ranges will be determined as per prevailing SEBI/ AMFI guidelines.

The cumulative gross exposure to equity, equity related instruments, debt, money market instruments and derivatives shall not exceed 100% of the net assets of the scheme.

The exposure to derivatives will not exceed 50% of the net assets of the scheme.

The Scheme may invest up to 20% of the scheme’s debt exposure in domestic securitized debt.

The Scheme may invest up to 25% in stocks listed on SME platform of BSE and NSE.

(Source: Scheme Information Document)

What will be the Investment Strategy?

The Principal Small Cap fund seeks to generate capital appreciation by investing predominantly in small-cap companies.

The fund manager will follow a bottom-up approach of stock selection and will aim to build a diversified portfolio with exposure across sectors. The universe of stocks will be selected to include companies having a robust business model and enjoying sustainable competitive advantages as compared to their competitors. Small-cap companies, as they are in a growth stage, may not be valued at their fair price. However, the fund manager intends to identify such strong growth companies & take advantage of their future appreciation.

Who will manage PSCF?

Principal Small Cap Fund will be co-managed by Mr P.V.K. Mohan and Mr Siddarth Mohta

Mr P.V.K. Mohan is the lead fund manager handling the scheme. He holds a bachelor’s degree in Technology (B. Tech) and has a PGDM to his credit. He has over 25 years of experience in Indian Equity markets. Prior to joining the Principal Mutual Fund as the Equity Head, he has worked with ICICI Prudential Asset Mgmt. Company Limited, DSP BlackRock Investment Managers Private Limited and IL&FS Mutual Fund.

Currently at the fund house, some of the other funds Mr Mohan manages include Principal Multi-Cap Growth Fund, Principal Tax Savings Fund, Principal Balanced Advantage Fund (Equity Portion), Principal Personal Tax Saver Fund, Principal Equity Savings Fund (Equity portion), Principal Retirement Savings Fund (Conservative Plan), Principal Retirement Savings Fund (Progressive Plan) and Principal Retirement Savings Fund (Moderate Plan).

Mr Siddarth Mohta has over 14 years of experience as an Equity Analyst/Finance Manager. He has done his MBA in Finance and Financial Risk management.

Currently, at the Principal Mutual Fund, he manages Principal Multi-Cap Growth Fund.

The outlook for PSCF:

As mentioned earlier, the Principal Small Cap fund aims to primarily tap the potential gains by investing in Small caps. Besides the recent market corrections have provided ample scope to cherry-pick stocks at moderate valuations. The small-cap space is under-researched and includes sectors where large and mid-caps have limited presence. It is possible because economic growth is expected to gather momentum.

The scheme will be actively managed, and the fund house follows a robust investment strategy based on in house research to implement a bottom-up approach to select stocks. Given the asset allocation, the fortune of PSCF will be closely linked to small-cap companies.

The value of the Scheme investments may be affected by factors, such as price and volume volatility in the stock markets (particularly small-cap domain), interest rates, currency exchange rates, foreign investments, changes in government policy, political, economic or other developments and closure of the stock exchanges. Besides the launch of the Principal Small Cap fund coincides with the Lok Sabha elections, a time when the equity markets experience severe volatility.

Hence, it will not be an easy year for wealth creation and volatility will be obvious. Hence, constructing the portfolio would be a challenging task for the fund manager, and if the Indian equity markets hit more turbulent waters ahead it may inflict high-risk.

PersonalFN is of the view that understanding the overall implications of investing in a small-cap fund is important. Note that small-cap funds are placed at the higher end of the risk-return spectrum.

Hence invest in small-cap funds only if you:

  • Have a very high-risk appetite
  • Can stay invested for 7-10 years without getting perturbed

[Read: Best SIPs To Invest in 2019]

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