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The Indian small cap indices, both the BSE Small-Cap TRI and Nifty Smallcap 250 TRI, have hit a lifetime high very recently.
Graph: The Nifty Smallcap 250 TRI: Up, Up and Away
Data as of October 16, 2024
Past performance is not indicative of future returns.
(Source: ACE MF, data collated by PersonalFN)
In the last five years, the Nifty Smallcap 250 TRI has increased 4.3 times, significantly outpacing the bellwether indices. And despite a spectacular rally, the small-cap investing mania seems to be unceasing.
The key factors driving the rally in small cap stocks are:
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India's robust economic fundamentals
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The fact that the country is the fastest growing economy (perceived to be a 'bright spot' globally)
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Smaller companies are contributing to India's growth story
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Encouraging earnings data reported by small cap companies
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Balance sheets seem robust, and
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Overall upbeat market sentiments are resulting in inflows into small caps over the past few years.
Moreover, sectors that have experienced notable performance, such as construction, engineering, and defence, have a greater representation of small and mid-cap companies, contributing to the overall outperformance of the segment. Watch this video:
In such times, Trust Mutual Fund has launched, the TRUSTMF Small Cap Fund capitalising on the opportunity. It is an open-ended equity scheme predominantly investing in small cap stocks.
The capital market regulator, the Securities and Exchange Board of India (SEBI) defines small-cap stocks as companies ranking beyond 250 in terms of full market capitalisation.
As per SEBI, small cap funds are mandated to invest at least 65% of their assets in equity and equity-related instruments of small-cap companies. The remaining 35% could be invested in stocks of large-cap or mid-cap companies, debt instruments, or cash and equivalents.
In line with these guidelines, TRUSTMF Small Cap Fund will invest a minimum of 65% of its total net assets in equity and equity-related instruments, including derivatives of small cap companies.
The balance 35% would be invested in equity and equity-related instruments including derivatives of other than small cap companies, debt & money market instruments, and units issued by REITs and InvITs.
The Scheme may also invest up to 25% of its net assets in foreign securities (including overseas ETFs), subject to regulatory requirements.
As regards investments in equity derivative instruments are concerned, they could be for non-hedging purposes and they shall be up to 50% of the equity portfolio of the Scheme.
The Scheme may also engage in securities lending and borrowing up to 20% of the net assets of the scheme and not more than 5% with a single party.
In the case of the debt portion of the portfolio, the Scheme may invest up to 35% in securitised debt. Investment in debt instruments with special features (AT1 and AT2 Bonds) will be up to 10% of the debt portfolio of the Scheme; and not more than 5% of the debt portfolio of the Scheme in instruments issued by a single issuer.
Investment in Structured Obligations (SO) or Credit Enhancements (CE) will be limited to 10% of the net assets of the Scheme.
As regards gross exposure to repo/reverse repo transactions in corporate debt securities, it shall be up to 10% of the net asset of the Scheme. Investment in tri-party repo will be restricted to 35% of the net assets of the Scheme.
The Scheme's investment in debt derivative instruments shall be up to 50% of the debt portfolio and for hedging purposes only. The Scheme will not invest in Credit Default Swaps (CDS).
Investment in units of other mutual fund schemes will be limited to 5% of the net assets of the mutual fund, without charging any fees.
Note, that the Scheme may engage in short selling of securities in accordance with the applicable guidelines/regulations.
What Is the Investment Objective?
The objective of the scheme is to generate long term capital appreciation by investing predominantly in equity and equity-related securities of small cap companies. However, there is no assurance that the investment objective of the scheme will be realized.
What is the Investment Strategy?
To achieve the stated investment objective, the Schemes will predominantly invest a minimum of 65% into Indian equity and equity-related instruments of small cap companies and the remaining assets in other than small cap companies.
From time to time, the fund manager may also participate in debt and debt-related securities up to 35% of its total assets for optimal portfolio construction.
The investment philosophy is to generate consistent, long-term, risk-adjusted returns.
The stock selection framework of the fund house seeks to add value through our differentiated insights or our variant perception on stocks and sectors. The investment opportunities will be evaluated taking into account:
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Megatrends in the environment and economy
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Leadership potential of the company
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Longevity of the business model
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Intangibles and other intrinsic edges that the company possesses
Image 1: Trust AMC's Portfolio Creation Process
The details mentioned herein are only for explaining the general concept of the portfolio creation process
*Growth at Reasonable Valuation
(Source: TRUSTMF Investor Presentation)
For portfolio creation, the Asset Management Company (AMC) will endeavour to add value by differentiated insights into companies, which may not be generally visible to the market. Differentiated insights help to estimate the 'Terminal Value' of the company by focusing on elements like megatrends, intangibles, leadership etc. Through research, the aim is to develop such insights that can create great value.
Image 2: Terminal Value Investing - Capturing outsized opportunities
(Source: TRUSTMF Investor Presentation)
The AMC will follow the principle of Growth at Reasonable Valuation while selecting stocks in the portfolio. Also, both qualitative and quantitative factors will be considered for the inclusion or exclusion of stocks.
As regards the debt portion of the portfolio, the fund management team will endeavour to maintain a consistent performance in the scheme by maintaining a balance between safety, liquidity and profitability aspects of various investments. The fund manager will try to achieve an optimal risk-return balance for the management of the fixed-income portfolios.
The investments in debt instruments carry various risks like interest rate risk, liquidity risk, default risk, purchasing power risk etc. While they cannot be done away with, they can be minimized by diversification and effective use of hedging techniques.
The fund management team will also take an active view of the interest rate movement by keeping a close watch on various parameters of the Indian economy, as well as developments in global markets Investment views/decisions will be taken based on the following parameters:
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Prevailing interest rate scenario
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Quality of the security/instrument (including the financial health of the issuer)
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Maturity profile of the instrument
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Liquidity of the security
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Growth prospects of the company/industry
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Any other factors in the opinion of the fund management team
As regards taking derivatives positions, it shall be based on opportunities available subject to the guidelines issued by SEBI from time to time and in line with the overall investment objective of the Scheme. These may be taken to hedge the portfolio, rebalance the same or undertake any other strategy as permitted under the SEBI Regulations.
Concerning the portfolio turnover, it will be the endeavour to optimize portfolio turnover to maximize gains and minimize risks keeping in mind the cost associated with it. The Scheme has no specific target relating to portfolio turnover.
The Asset Management Company (AMC) has incorporated adequate safeguards to manage risk in the portfolio construction process. Risk control would involve managing risk to keep it in line with the investment objective of the Scheme.
Overall, the fund house endeavours to construct our portfolios by following a credible investment process.
The performance of TRUSTMF Small Cap Fund will be benchmarked against the Nifty Smallcap 250 TRI.
Here's what, Mr Sandeep Bagla, CEO of TRUSTMF said about the fund launch:
“The small-cap market offers a vast array of investment choices, including sectors like consumption, financialization and physical asset creation, which we believe have a long runway for growth."
Here's what Mr Mihir Vora, CIO of TRUSTMF said speaking to the Economic Times:
"The small-cap segment is a unique space for investors to discover high-growth companies early in their journey. Our strong research foundation at TRUST MF allows us to identify these promising stocks. Our investment philosophy of Terminal value investing focuses not only on good growth in the near future but attributes even more importance to the length of the growth runway. This allows us to put an appropriate valuation to the long-term growth potential and ensures that we remain committed to businesses throughout their entire value creation journey. In the small-cap space, this approach is crucial, as these companies often have a long, underappreciated runway for growth."
Who Will Manage TRUSTMF Small Cap Fund?
Mr Mihir Vora and Mr Aakash Manghani are the fund managers for TRUSTMF Small Cap Fund.
Mr. Mihir Vora has experience of over 29 years in fund management across various verticals in the financial services industry, viz. mutual funds, insurance, and sovereign funds. He has been with TRUSTMF as CIO since October 2023.
Before that, he served as CIO of Max Life Insurance Company and was managing offshore investments at Birla Sunlife Asset Management.
Mihir is an engineering graduate (B.E) and holds a postgraduate diploma in management (PGDM) from IIM - Lucknow and is a Chartered Financial Analyst (CFA) from the CFA Institute, USA.
Mr Aakash Manghani has an experience of over 14 years in equities, he has honed his expertise in research and portfolio management, demonstrating a keen analytical focus across diverse sectors.
He joined TRUSTMF as a fund manager in February 2024 and before that was a fund manager at ICICI Prudential Life Insurance and BOI AXA Investment Managers Private Limited.
Currently, Mihir and Aakash together also manage the TRUSTMF Flexi Cap Fund.
How much is the Minimum Investment in TRUSTMF Small Cap Fund?
During the NFO period and ongoing basis, the minimum investment in the Scheme is Rs 1,000/- and in multiples of Re. 1/- thereafter. This is also applicable for switch-in.
For the Systematic Investment Plan (SIP), the minimum SIP amount is Rs 1,000/- (plus in multiple of any amount) in the case of weekly, fortnightly, and monthly SIP with the minimum instalments of 24, 12, and 6, respectively.
For quarterly SIP, the minimum investment amount is Rs 3,000/- (plus in multiples of any amount) and a minimum of 4 instalments.
The Scheme offers both, the Direct and Regular Plan and the Growth Option Income Distribution cum Capital Withdrawal (IDCW) for investment.
Who Should Consider Investing in TRUSTMF Small Cap Fund?
While the small caps are usually companies in the high growth phase, may belong to high growth sectors and unique themes, have the potential to become midcaps and large caps of the future, provide the prospect for long-term wealth creation and prove to be multi-baggers plus there is a wider universe of small caps; it should be noted that there is also a very high risk.
Since small caps are inherently riskier than well-established companies, one cannot expect all bets to turn out well always. The chances of failure in smaller-sized businesses are much higher compared to bigger businesses.
Also, when market sentiments turn pessimistic, the downside risk is higher in the case of small caps compared to mid and large caps. In other words, the investments can fluctuate from thrilling highs to dangerous lows, much akin to riding a roller coaster ride.For this reason, small cap funds are placed on the higher end of the risk-return spectrum, and it is not always true that very high risk will translate into very high returns.
This highlights that the small-cap investment is not for the faint of heart. Only if you are willing to take a very high-risk appetite and have an investment horizon of 7-10 years can consider investing in Small Cap Funds. However, in this case as well, you should avoid going gung-ho and allocating small cap funds into your core portfolio.
Small cap fund/s may be considered for your 'satellite' portfolio if you have the stomach for very high risk. But in this case as well, the allocation should ideally be small up to 10-12%.
The other sub-categories of equity mutual funds you could consider adding in the 'satellite' portion of the equity mutual fund portfolio could be some of the best mid cap funds and a couple of aggressive hybrid funds.
To know more about the TRUSTMF Small Cap Fund read the Scheme Information Document and Key Information Memorandum.
Make an informed investment decision and be a thoughtful investor.
Happy Investing!