Recently improved market sentiment is taking the indices higher up, and the small-cap index that was hammered down for over a year, gradually is inching up. A significant correction is seen in the small-cap space, which presents an opportunity to do value buying. Some of the fund houses are of the view that these conditions augur well to invest in small-cap funds for a long-term investment time horizon of more than 5 years, if stocks are selected carefully.

Even ITI Mutual Fund, relatively a new fund house is of the view that small-cap companies have the potential to grow higher as they are in the early stages of their development. And investing in them when the pessimism is at the highest because they are available at cheap valuations makes it the right time to invest provided with a sound investment strategy.

Thus, it has launched the ITI Small Cap Fund, an open-ended equity scheme predominantly investing in small-cap stocks. 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.

ITI Small Cap Fund will allocate its assets as per mandated but will be benchmark and sector agonistic. The stocks selection will be done on quality, scalability, and stability.

However, note that small-cap stocks, due to their size, usually have a low trading volume and less liquidity. Hence small-cap funds have the tendency to go from thrilling highs to dangerous lows.

That’s why as ITISCF will majorly invest in small-cap stocks will incur higher risk. So, investors need to be wary of high volatility.

[Read: Looking for Best Small Cap Funds to Invest in 2020?]

Table 1: ITI Small Cap Fund details

(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: ITISCF’s Asset Allocation

Instruments	Indicative Allocation (% of Net Assets)		Risk Profile
	Maximum	Minimum
Equity and Equity related instruments of small-cap companies**	100	65	High
Equity and Equity Related Instruments of other than small-cap Companies	35	0	High
Debt and Money Market Instruments	35	0	Low to Medium
Units issued by REITs and InvITs	10	0	Medium to High

**Investment universe of Small Cap: The investment universe of “Small Cap” shall comprise companies as defined by SEBI from time to time.

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 every six months based on the data as on the end of June and December of each year or 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.

Other equities could include stocks other than small-cap. Large Cap means 1st -100th company in terms of full market capitalization. Mid Cap: 101st to 250th company in terms of full market capitalization. The exposure will be as per limits/classification defined by AMFI/SEBI from time to time.

(Source: Scheme Information Document) 

What will the Investment Strategy be?

The Scheme shall follow a predominantly small-cap strategy with a minimum exposure of 65% to Small-Cap stocks.

Small-cap companies are companies which have a market capitalization less than the top 250th listed company in terms of market capitalisation as prescribed under SEBI circular no. SEBI/HO/IMD/DF3/ CIR/P/2017/114 dated October 06, 2017, as amended from time to time.

The Scheme may also seek participation in other equity and equity-related securities to achieve optimal portfolio construction. The portfolio will be built utilising a bottom-up stock selection process, focusing on appreciation potential of individual stocks from a fundamental perspective.

The Scheme may also invest a certain portion of its corpus in debt and money market securities. Investment in debt securities will be guided by credit quality, liquidity, interest rates, and their outlook.

Who will manage ITISCF?

ITI SmallCap Fund will be co-managed by Mr George Heber Joseph and Mr Pradeep Gokhale.

Mr George Heber Joseph is the Chief Executive Officer (CEO) and Chief Investment Officer (CIO) at ITI Mutual Fund. He holds a bachelor’s degree in English language & Literature (BA) and commerce (BCom). Mr George is also a qualified member of associate member of Chartered Accountants of India and an associate member of Cost and Management Accountants of India. He has over 16 years of work experience in Fund Management, Equity Research and Capital Markets.

Prior to joining, ITI Mutual Fund, he was working as a Senior Fund Manager (Vice President Grade & Key Management Personnel) at ICICI Prudential Asset Management Co. Ltd. handling two flagship funds. He was associated with the Fund Management Team of ICICI Prudential Asset Management Company Limited for nearly a decade tracking various sectors and a wide variety of stocks. During his tenure, he was also heading the Portfolio Management Services Division, was responsible to oversee fund managers activities, managing research analysts, performance measurement, and worked as a sounding board for fund managers as well. Before that, in his previous assignments, he has been associated with organisations like DSP Merrill Lynch Ltd, Wipro Ltd, MetLife India, Cholamandalam Investments & Finance Company Ltd and Tanfac Industries Ltd where he has handled fund management and corporate treasury responsibilities.

Some of the other schemes co-managed by Mr George Heber Joseph include ITI Liquid Fund, ITI Multi-Cap Fund, ITI Long Term Equity Fund, ITI Arbitrage Fund, ITI Overnight Fund, ITI Balanced Advantage Fund.

Mr Pradeep Gokhale joined ITI mutual fund as the Senior Fund Manager. He has a bachelor’s degree in commerce (B. Com), is a Chartered Accountant and CFA. He has a work experience of over 23 years in Fund Management, Equity Research, Credit Evaluation & ratings.

Mr Pradeep Gokhale is the dedicated fund manager for making overseas investments. Before joining the fund house, he has been associated with the Fund Management Team of Tata Asset Management for 14 years. Prior to joining Tata Asset Management, he was Head of Financial Sector and Securitisation Ratings at CARE Ratings Ltd. He has also worked in corporate finance departments of companies like Bombay Dyeing, Tata International and Lubrizol India Ltd.

Some of the other schemes co-managed by Mr Pradeep Gokhale include ITI Multi-Cap Fund, ITI Long Term Equity Fund, and ITI Balanced Advantage Fund.

The outlook for ITI Small Cap Fund.

As mentioned earlier, the ITI Small Cap fund aims to primarily tap the potential gains by investing in Small caps by active fund management. Besides the recent market corrections have provided ample scope to cherry-pick stocks at moderate valuations, the performance of the scheme relies on the stocks held.

The experienced fund managers will create a robust portfolio by implementing equity investment philosophy (as given in its presentation) represented by “SQL” focusing on three main pillars.

“S”: Margin of Safety,

“Q”: Quality of the business

“L”: Low Leverage.

And the portfolio created will be such that it will be diversified to achieve the stated objective of the scheme and would be benchmark and sector agnostics, with a maximum exposure of 3% to any stock.

Image: Illustration of the Portfolio structure

(Source: ITI Small cap Fund Presentation)

Despite the rigorous research based on the latest economic & market information to construct the portfolio, it remains to be seen how it is being constructed. In an environment where the near-term sentiments in equity markets will be driven by macroeconomic conditions, on-going geopolitical tensions, domestic political developments, along with all eyes on the upcoming budget, the markets are expected to remain highly volatile.

Hence, the construction of the portfolio would be a challenge for the fund managers to spot opportunities in the current environment and the risk management measures they adopt.

PersonalFN believes that the current time does provide an opportunity to the fund managers to do some value buying. However, amidst the extreme turbulence, constructing the portfolio would not be easy and may inflict extremely-high-risk. Therefore, although there may be good opportunities in the long run, the risk could be very high as well.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

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

This article first appeared on PersonalFN here