Small cap stocks have got a severe beating over the past one year. S&P BSE Small Cap index is down around 26 per cent over the past one year. Edelweiss Mutual Fund believes it is an opportune time to invest in small cap stocks and has launched a small cap fund. Radhika Gupta, CEO, Edelweiss Asset Management Ltd. said, “Investing in Small caps can be rewarding if returns for the last one year have been negative, but underlying earnings are picking-up. We believe our experience in successfully managing our midcap fund over last 10 years through bottom-up stock picking will help in identifying opportunities in the small cap segment for our customers.”
The new fund offer (NFO) is open for subscription between January 18 to February 01, 2019. The fund is benchmarked against Nifty Small Cap 250 TR index.
The fund is offering a unique feature- STeP Facility- in which the money will be invested in staggered manner rather than lumpsum for those investing during the NFO period. If an investor invests in the new fund offer (NFO), 20 per cent of the money will be invested in the small cap fund while the rest will be invested in Edelweiss liquid fund. The money from the liquid fund will be switched to small cap fund in four equal installments as and when the triggers are hit.
Next 20 per cent will be invested on a three per cent fall in the Small cap index or on the last business day of the month if trigger is not hit. Similarly, the next three installments will be invested on a subsequent fall of three per cent or last business day of the respective month if the trigger is not met.
The trigger facility is only available during the NFO. Apart from this, the fund will try to mitigate the downside risk through a diversified portfolio, maintaining a balance between quality and liquidity.
The fund house classifies the stocks to consider for the portfolio into four different buckets – strategic, tactical, defensive and options, based on the characteristics and role they are expected to play in the portfolio. Strategic allocation is the core part of the portfolio; typically a buy and hold kind of a stock. Tactical allocation is into a business in a cyclical industry, which is well levered to the upturn. Option is a business offering potentially large scale-up opportunity but without sufficient track record and typically has a higher degree of risk. Defensive allocation is to reduce market underperformance risk and align the portfolio closed to the benchmark.
“A similar approach will be followed for our small-cap category since we believe this framework is useful both in research and portfolio management process as it provides a context for analysis and review,” said Radhika.
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You should know that small cap stocks are more volatile than their larger counterparts. They carry higher downside risk, but they do have the potential to deliver superior return if stock market performs well. You should invest in small cap funds for long-term and the allocation should be in line with your risk appetite.
We advise investors to invest in funds with a proven track record and invest in an NFO only if they believe it is offering something unique. The staggered approach offered by the Edelweiss Small Cap fund will be helpful in case of lumpsum investments. However, one can always use a systematic investment plan (SIP) route to invest in an equity mutual fund.