IDFC Mutual Fund launches an open-ended equity scheme, IDFC Emerging Businesses Fund, that will invest predominantly in small cap stocks. This is because a significant correction is seen in the small-cap space, which has presented an opportunity to do value buying.

The fund house believes that Price, Valuation, and Volume indicate an attractive Entry Point for investing in small caps now, hence launched IDFC Emerging Businesses Fund.

We’ve seen a significant rise in a number of small cap companies over the last few years. The fund house is of the view that small cap companies provides opportunities to invest in niche opportunities that aren’t available in the Large Cap space and these are spread across broad range of sectors and companies that offer the widest part of the market capitalisation segment.

Image 1: Illustration of some of the industries that are part of small cap domain

Image 1: Illustration of some of the industries that are part of small cap domain

(Source: IDFC Emerging Business Fund Presentation)

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 the SEBI mandate, Small-cap equity funds should invest at least 65% of their assets in companies below the top 250 by market capitalisation and IDFC Emerging Business Fund (IEBF) will allocate its assets as per mandated.

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 IEBF 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: IDFC Emerging Business Fund details

TypeAn open-ended equity scheme predominantly investing in small cap stocksCategorySmall-cap Funds
Investment ObjectiveTo generate long term capital appreciation by investing predominantly in equities and equity linked securities of small cap segment.
Disclaimer: There is no assurance or guarantee that the objectives of the scheme will be realised.
Min. InvestmentFresh Purchase (including switch-in) – Rs 5,000/- and any amount thereafter.
Additional Purchase (including switch-in) – Rs1,000/- and any amount thereafter
Face ValueRs 10 per unit
PlansDirectRegularOptionsGrowth*Dividend (Payout# and Sweep)*Default option # Default option for Dividend
Entry LoadNilExit Load1% if redeemed/switched out within 1 year from the date of allotment
Fund ManagerMr Anoop Bhaskar and Mr Viraj KulkarniBenchmark IndexS&P BSE 250 SmallCap TRI
Issue OpensFebruary 03, 2020Issue Closes:February 17, 2020

(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:  IEBF’s Asset Allocation

Instruments Indicative Allocation (% of Net Assets) Risk Profile
Equity and equity related instruments of Small Cap companies 65% – 100% Medium to High
Equity and equity related instruments of Other companies 0% – 35% Medium to High
Debt Securities and Money Market Instruments (including Government securities, Securitised debt and Cash and Cash equivalents) 0% – 35% Low to Medium
Units issued by REITs and InvITs 0% – 10% Medium to High

Large Cap companies, Mid cap companies and Small cap companies shall have the meaning as defined by SEBI from time to time.

  • Investment in Foreign securities – up to 35% of the total assets
  • Investment in Securities lending – up to 20% of the total assets with maximum single party exposure restricted to 5% of the total assets.
  • Exposure in Derivatives (other than for hedging purpose) – up to 50% of total assets
  • Gross Exposure to Repo of Corporate Debt Securities – upto the extent permitted by the Regulations (currently up to 10% of total assets, subject to change in line with the regulations from time to time)

(Source: Scheme Information Document)

What will the Investment Strategy be?

The IDFC Emerging Businesses Fund seeks to capture opportunities available in the small cap segment. The fund shall invest a minimum of 65% of its corpus in the small cap companies. The remaining portion will be invested depending on the market conditions and in line with the fund manager’s views.

Who will manage IEBF?

Mr Anoop Bhasker is the dedicated fund manager to manage IDFC Emerging Business Fund and Mr Viraj Kulkarni will be managing the foreign/overseas investments of the scheme.

Mr Bhaskar has an experience spanning over 29 years in the mutual fund industry. He has been associated with IDFC AMC since February 2016. Prior to joining IDFC AMC, he was associated with UTI Asset Management Company Ltd. as Head of Equity, responsible for overall domestic Equity fund management (Apr.2007 – Jan.2016). Prior to that he was associated with Sundaram Asset Management Company Limited as Fund Manager, responsible for Fund Management (Aug.2003 – Mar.2007).

Some of the other Schemes managed/co-managed by Mr Anoop Bhaskar include, IDFC Core Equity FundIDFC Multi Cap FundIDFC Hybrid Equity FundIDFC Sterling Value FundIDFC Equity Opportunities Series – 5, and IDFC Equity Opportunities Series – 6.

Table 3: Performance of schemes managed by Mr Anoop Bhaskar

Scheme Name Benchmark name Managed Since Scheme Returns (%) Benchmark Returns (%)
Open-ended schemes
IDFC Core Equity Fund Nifty LargeMidcap 250 Index – TRI Apr-16 13.86 13.28
IDFC Multi Cap Fund S&P BSE 500 – TRI 10.33 12.83
IDFC Sterling Value Fund S&P BSE 400 MidSmallCap Index – TRI 11.84 10.57
IDFC Hybrid Equity Fund S&P BSE 200 – TRI Jan-17 7.18 12.25
Close-ended schemes
IDFC Equity Opportunity-5 S&P BSE 500 Mar-18 4.12 5.71
IDFC Equity Opportunity-6 Jul-18 8.01 1.45

(Source: ACE MF, PersonalFN Research)
(Data as on January 31, 2020)

As can be seen from the performance table, out of six schemes managed by the fund manager only two schemes have been outperforming their respective benchmark index. Hence the management style does not give much confidence to investors.

Mr Viraj Kulkarni joined IDFC AMC in September 2015. Before joining IDFC AMC, he has worked with Franklin Templeton Asset Management (India) Pvt Ltd as a Management Trainee, and at Goldman Sachs Services India as an Analyst, Wealth Management Technology.

The outlook for IDFC Emerging Business Fund.

To achieve the stated objective of the scheme, the IDFC Emerging Business Fund will be actively managed by the fund manager and will invest in small cap companies predominantly.

For portfolio construction, the fund manager will implement a strategy of Buy and Hold (Strategic), Opportunistic (Cyclical) and New business (IPOs). The stock selection will be based on quality and growth with adequate risk mitigation measures.

Image 2: Stock selection and Risk management

Image 2: Stock selection and Risk management

(Source: IDFC Emerging Business Fund Presentation)

Despite the value buying opportunities present in the small cap space, 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 unappealing budget and the muted third quarter earnings of most of the companies, the markets are expected to remain highly volatile.

Hence, the construction of the portfolio would be a challenge for the fund manager 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

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