Over the past few years, the performance of small-cap funds has been disappointing. The series of lockdowns post the COVID-19 pandemic had severely affected many small-sized companies. Nevertheless, the government undertook various measures to support the economy and initiatives to help small businesses recover. When the equity market recovered after the March 2020 lows, the small-cap segment was the frontrunner and made a strong comeback.

Recently, the small-cap space has gained traction and liquidity has improved with investors increasing their participation. Many investors are warming up the notion of investing in small caps that aim for potential growth, despite it being a high-risk high-return investment proposition.

Consequently, with improved government policies focusing on infrastructure and production-linked incentives, etc., many small-cap companies are likely to achieve enhanced growth. The increased availability of vaccines and proactive measures to tackle the anticipated third wave of COVID-19 could be huge positives for economic revival.

Despite the stretched valuations, PGIM India Mutual Fund believes that the small-cap space offers a long-term growth opportunity. The fund house has launched a new scheme PGIM India Small Cap Fund. It is an open-ended equity scheme that will predominantly invest in small-cap stocks.

On the launch of this fund, Mr Ajit Menon, CEO at PGIM India Asset Management Pvt. Ltd. said, “We believe that listed entities in the small-cap segment are the biggest beneficiaries of developments. Such as, significant recovery in corporate earnings, expected in the coming months coupled with multiple tailwinds like the government trying to boost manufacturing through PLI schemes, lower taxation, and various concessions. Industry consolidation is more pronounced in the areas where the small caps operate because most small-cap companies compete with the unorganized players.”

“In order to capture quality investment opportunities, we have launched the PGIM India Small Cap Fund. The idea is to help investors gain exposure to business segments like construction, textiles, real estate, chemicals and agrochemicals, Industrials, paper and the like that find limited representation in the large-cap space”, he added further.

Table 1: Details of PGIM India Small Cap Fund

Type An open-ended equity scheme predominantly investing in small cap stocks. Category Small-cap Fund
Investment Objective To achieve long term capital appreciation by predominantly investing in equity and equity related instruments of small cap companies. However, there can be no assurance that the investment objective of the Scheme will be achieved. The Scheme does not guarantee/ indicate any returns.
Min. Investment Rs 5,000 and in multiples of Re 1/- thereafter with no upper limitAdditional Purchase Rs 1000/- and in multiples of Re 1/- there after Face Value Rs 10/- per unit
  • Direct
  • Regular
  • Growth
  • Dividend
Entry Load Not Applicable Exit Load
  • 10% of the units allotted may be redeemed/switched-out to debt schemes/PGIM India Arbitrage Fund without any exit load within 90 days from the date of allotment;
  • Any redemptions/switch-outs in excess of the abovementioned limit would be subject to an exit load of 0.50%, if the units are redeemed/switched-out to debt schemes/PGIM India Arbitrage Fund within 90 days from the date of allotment of units;
  • Nil – If the units are redeemed/ switched-out after 90 days from the date of allotment of units;
  • No exit load will be charged for switches and STP between any open-ended equity scheme, hybrid scheme (except PGIM India Arbitrage Fund) and fund of funds scheme.
Fund Manager
  • – Mr Aniruddha Naha
  • – Mr Kumaresh Ramakrishnan
  • – Mr Ravi Adukia
Benchmark Index Nifty Small Cap 100 TRI
Issue Opens: July 09, 2021 Issue Closes July 23, 2021

(Source: Scheme Information Document)  

What will the Investment strategy for PGIM India Small Cap Fund be?

PGIM India Small Cap Fund will predominantly invest in equity and equity related instruments of small-cap companies with an aim for long-term capital appreciation. The scheme may also seek to participate in the growth of other equity and equity related instruments to construct an optimal portfolio.

This scheme endeavours to capture opportunities available in the small-cap segment. Small caps are companies that have a market capitalization of less than the 250th listed company, in terms of market capitalization, as declared by AMFI.

The scheme will follow an investment strategy that is a combination of the top-down and bottom-up portfolio construction process, focusing on the fundamentals of each stock, including the quality of its management. It may also consider investing in large-cap, mid-cap, and overseas companies depending on the fund managers’ market outlook.

The fund managers will actively manage the scheme and aim to build a diversified portfolio with exposure across sectors, given the fact that small-cap stocks present a much wider universe compared to the universe of large-caps and mid-cap stocks.

About the benchmark

The NIFTY Smallcap 100 Index is designed to reflect the behaviour and performance of the small-cap segment of the financial market. The NIFTY Smallcap 100 Index comprises 100 tradable stocks listed at the National Stock Exchange (NSE).

Under normal circumstances, asset allocation will be as under:

Table 2: Asset Allocation of PGIM India Small Cap Fund

Instruments Indicative Allocation(% of Net Assets) Risk Profile
Minimum Maximum High/Medium/Low
Equity & Equity Related Instruments of Small Cap Companies 65 100 Medium to High
Equity & Equity Related Instruments of other companies 0 35 Medium to High
Debt and Money Market instruments (including cash and cash equivalents), Liquid and Debt Schemes of Mutual Fund 0 35 Low to Medium
Units issued by REITs and InvITs 0 10 Medium to High

(Source: Scheme Information Document)  

Apart from investing 65% of its assets in equity & equity related instruments of small-cap companies, this scheme may also invest up to 35% in equity instruments of other companies. It may also invest up to 35% in debt and money market instruments, liquid and debt schemes, and up to 10% in units issued by REITs and InvITs.

Who will manage PGIM India Small Cap Fund?

The fund will be managed by Mr Aniruddha Naha (for equity), Mr Kumaresh Ramakrishnan (for debt), and Mr Ravi Adukia (for overseas investments).

Mr Anirudha Naha is Senior Fund Manager – Equity at PGIM India Asset Management Pvt. Ltd. His qualification includes Masters in Finance and Control with experience over 19 years in the equity and debt market. Prior to this, he was associated with Avendus Wealth Management Pvt. Ltd. as Portfolio Manager, IDFC Asset Management Company Ltd. as Fund Manager, Mirae Asset Global Investments (Hong Kong) Ltd. as Portfolio Manager, and DSP BlackRock Investment Managers Pvt. Ltd. as Fund Manager.

The other schemes he manages are PGIM India Flexi Cap Fund, PGIM India Midcap Opportunities Fund, and PGIM India Balanced Advantage Fund.

Mr Kumaresh Ramakrishnan is Head – Fixed Income at PGIM India Asset Management Pvt. Ltd. and he has over 21 years of work experience in the Indian Fixed Income markets. Prior to this, he worked as Head – Fixed Income with Deutsche Asset Management (India) Private Limited, Senior Credit analyst with Societe Generale (SG), and Senior Rating analyst with Credit Analysis & Research Ltd. (CARE).

Mr Ramakrishnan’s qualification includes B.E. (Mumbai University) and MBA (MMS). The other schemes he manages for the Debt portion are PGIM India Equity Savings Fund, PGIM India Hybrid Equity Fund, PGIM India Arbitrage Fund, PGIM India Overnight Fund, PGIM India Ultra Short Term Fund, PGIM India Money Market Fund, PGIM India Low Duration Fund, PGIM India Short Maturity Fund, PGIM India Credit Risk Fund, PGIM India Balanced Advantage Fund, PGIM India Dual Advantage Series – 1, and PGIM India Fixed Duration Fund – Series- AY, AZ, BA, BB, BC, and BE.

Mr Ravi Adukia is Equity Analyst and Fund Manager overseas investments at PGIM India Asset Management Pvt. Ltd. He is a Chartered Accountant (CA), CS and CFA with more than 15 years of experience in Indian financial markets, primarily in equity research. Prior to this, he was associated with PGIM India Asset Management Pvt. Ltd. as Equity Analyst, Nomura Financial Advisory & Services India (P) Ltd. as Vice President (Equities), Irevna Research Services (P) Ltd (Unit of Crisil Ltd) – Manager (Research).

The other schemes Mr Adukia manages are PGIM India Global Equity Opportunities Fund, PGIM India Emerging Markets Equity Fund, PGIM India Balanced Advantage Fund, PGIM India Flexi Cap Fund, and PGIM India Hybrid Equity Fund.

Fund Outlook – PGIM India Small Cap Fund

This scheme will aim to invest in listed entities in the small-cap segment. These are the companies that hold the growth potential to graduate into a mid-cap and eventually a large-cap stock.

The scheme offers investors an opportunity to invest in small-cap companies that may generate alpha over the long term. Small cap presents a wider universe with exposure across several sectors. Small-cap companies are under-owned and under-researched, which offers investors an opportunity to earn optimal returns.

Although small-cap funds have recovered from underperformance and have had a splendid run over the past year, do not be lured by the performance in market rallies. Small-cap funds are high-risk high-return investment propositions. This means that smalls-cap funds are highly volatile as compared to their large cap and mid-cap peers.

Small-cap companies have limited access to various resources unlike large-cap companies. These companies may face survival risk amid the economic downturn. Small-cap funds are also prone to liquidity risk due to the limited number of shares, which makes it difficult for investors to buy and sell as per their requirement.

PGIM India Small Cap Fund’s performance will depend on the fund managers’ ability of selecting quality stocks at reasonable valuations for portfolio construction.

This scheme is suitable for investors with a high-risk appetite seeking a higher return potential, and have a long investment horizon of at least 5-7 years to survive the market volatility.

This article first appeared on PersonalFN here

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