Edelweiss Small Cap Fund NFO: Wealth creation through small cap investing

Jan 23, 2019 / Advisorkhoj Research Team | 10 Downloaded |  5536 Viewed | | | 3.0 |  10 votes | Rate this Article
Mutual Funds article in Advisorkhoj - Edelweiss Small Cap Fund NFO: Wealth creation through small cap investing
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Edelweiss Mutual Fund has launched a new fund Edelweiss Small Cap Fund. The NFO opened for subscription on January 18 and will close on February 1, 2019. The last one year has been very difficult for small cap stocks with the Nifty Small Cap 250 Index falling 28% in 2018. Deep corrections however, create attractive investment opportunities and this may be an exciting time for investing in small cap stocks.

Why Small Cap?

  • Small Cap stocks usually outperform large cap stocks over long investment horizon. In the last 15 years, the BSE Small-Cap Index rose 16.5 times, while the BSE Sensex (index of the largest 30 stocks by market cap) rose 11.3 times. Even in a mature market like the US, small cap stocks have outperformed large cap in the last 15 years.

  • Over long tenors, fundamentals have driven small cap performance. Quality small-cap stocks have delivered stronger earnings per share growth compared to their large-cap counterparts. Stronger earnings growth leads to small cap outperformance in the long term

  • The alpha creation opportunity is much bigger in the small cap compared to the large and midcap segments because small cap stocks tend to be under-researched relative to large and midcaps. Most research analysts cover large and midcap stocks. Under-researched quality stocks may have valuation arbitrage potential which good fund managers can spot early to create alphas.

  • The universe of stocks in large and midcap segments has shrunk post SEBI’s mutual fund scheme categorization. While there are only 100 stocks in large cap and 150 stocks in midcap segments, there are more than 2,500 stocks in the small cap segment. The broader investment opportunity in small cap segment may increasingly lead fund managers to invest in these stocks to create alphas. Higher demand for small caps can benefit small cap investors. Edelweiss estimates that over Rs 1 Lakh crore can flow into the small cap segment (see chart below).

    Mutual Funds - Over Rs 1 Lakh crore can flow into the small cap segment

    Source: Edelweiss Mutual Fund

  • Small caps have strong presence in certain industry sectors with high growth potential, where large and midcap stocks have much smaller presence e.g. chemical companies, staffing companies etc. Investors can leverage the growth potential of these sectors by investing in small caps.

Why invest in small cap now?

  • Historical data shows that deep corrections provided attractive investment opportunities in the small cap segment. When the Nifty Small Cap 250 Index fell by 20 to 30% in the past, the subsequent 5 year average CAGR was around 14%. When the small cap index fell by 10 to 20%, it gave 15% CAGR returns in the next 5 years.

  • Over the past 1 year, 78% of small cap stocks have corrected by more than 30% from their peaks and 25% small cap stocks have fallen more than 50% from the peaks. Going by historical evidence this may provide attractive investment opportunities.

  • Historical data shows that, small caps bounce back stronger after underperforming large caps (see the chart below). The relative underperformance of small cap in 2018 has been the most severe in the last 10 years, signaling attractive investment opportunities in this segment now.

    Mutual Funds - Small caps bounce back stronger after underperforming large caps

    Source: Edelweiss Mutual Fund

  • Sharp price cuts improve risk return trade-off for quality stocks (stocks which deliver strong EPS growth). The price correction in quality small cap stocks over the past 1 year is likely to improve the risk reward in their favor.

Why invest in Edelweiss Small Cap Fund?

  • The fund has a unique portfolio allocation strategy to ensure performance consistency. The fund manager will invest in 4 different buckets – strategic (core portfolio for buy and hold), tactical (to leverage cyclical opportunities), options (high risk/return) and defensive (to provide stability).

  • The fund will focus on liquidity (to reduce impact cost), diversification (to manage concentration and liquidity risk) and rigorous quality check (management quality and earnings visibility).

  • The fund manager (Harish Patwardhan) has a long and successful investment track record. Edelweiss Midcap Fund managed by MrPatwardhan has outperformed its benchmark index across different time-scales; 23% annualized returns in the last 5 years.

  • The fund manager will follow a process driven investment approach backed by in-depth research capabilities of the AMC.

Who should invest in the NFO?

  • Investors who want to invest for more than 5 years and can be patient during volatile markets

  • Investors who have higher risk appetite and want aggressive portfolio allocation

  • Investors who are looking to invest in small-caps as a part of asset allocation

Reduce timing risk through STeP

Though small stocks have corrected sharply over the past 12 months, further corrections cannot be ruled out. Edelweiss’ STeP investment facility available with this NFO will enable you to invest systematically in the fund in staggered based on price and time triggers.

If you opt for STeP, 20% of your subscription amount will be invested in the Small Cap Fund and the balance in the Edelweiss Liquid Fund. The investment in liquid fund will be transferred to the Small Cap Fund in 4 installments on monthly dips. Each transfer will be triggered if there is a 3% correction in the small cap index or the last date of the month, if the trigger is not hit during the month. The STeP facility will allow you to take advantage of volatility when investing in lump sum.

Key NFO Features

  • NFO Period:

    January 18 to February 1, 2019

  • Exit Load:

    If units are redeemed or switched out before 365 days – 1%, if units are redeemed or switched out after 365 days – Nil

  • Switches:

    Switches from equity schemes and other schemes – Feb1, 2019; till cut off time

  • Plans and Options:

    Direct and Regular Plan with Growth and Dividend Payout & Sweep

  • Minimum Investment Amount:

    Rs.5,000/- (plus in multiple of Re. 1)

  • Fund Manager:

    Harish Patwardhan

  • Benchmark Index:

    Nifty Small Cap 250 Total Returns Index

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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