Rel Small Cap NFO to bet on hospitality, education

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Reliance Mutual Fund, part of Anil Ambani's Reliance Capital is launching a new fund offer (NFO) for Small Cap Fund.

The NFO will open on August 26 and close on September 9. The scheme proposes to invest at least 65% of the corpus in equity and equity-related instruments of small cap companies, which may go up to 100% of the corpus.

In an interview to CNBC-TV18, Sunil Singhania, Senior Vice President, Equity at Reliance Capital said that the Small Cap Fund will complete its portfolio. Singhania added that the NFO will take advantage of new themes like education and hospitality.

Explaining the rationale behind launching a small cap fund, he said that the small cap fund is high risk but high return fund as there is a big valuation gap between large caps and small caps.

Singhania is expecting redemption pressures to ease off significantly. He added, "Earnings growth is likely to be over 20% in FY11 and FY12."

Here is the verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Take us through this smallcap product? What is the rationale behind this launch? We have seen a phenomenal rally play out over the last month or two in smallcap names?

A: As far as the rationale is concerned, this was one product which was missing from our stable. We did not have a pure smallcap fund. To complete our product portfolio we are launching this fund. It would have been in hindsight a good thing to launch it last year, but everything looks very simple in hindsight.

From hereon, despite the current move which we are seeing in a lot of smallcaps, as long as the India story of more than 8% growth continues, there will be a lot of smaller companies that will have the potential to grow faster. A lot of new themes are emerging. You saw retail and technology emerging as new themes a few years back.

You are seeing education, hospitality, healthcare emerging as new themes. When a new theme emerges, it is the smaller companies which are the obvious bets, because new themes start small. A combination of valuation gap between the largecap and the smallcap, possibility of faster growth and exposure to new themes, these would be the basic advantages of investing through a smallcap.

Q: You don't think the timing is inappropriate? By the time you get your money and start investing, some of these smallcap spaces, if they carry on like this, might be trading at bubble like valuations. You don't think you run the risk of entering then and getting into a prolonged phase of correction?

A: While admitting that there has been a lot of euphoric kinds of situation in the smaller companies, a lot of these companies are moving up on speculation rather than fundamentals. At the same time there are many fundamentally strong companies which are being ignored by the market. Smallcap should not be looked at as a basket. You will have to individually look at companies.

If you are looking ahead and you feel that India's gross domestic product (GDP) from USD 1 trillion can grow to USD 4 trillion in the next 12-13 years, then opportunities are definitely there for the long-term investors.

As has been seen in our earlier fund launches, we take our own sweet time to create a portfolio. If the valuations do run out of sync and we feel they are in a euphoric zone, we will take our time to create a portfolio. I think those kinds of flexibilities we have and we are very sure that from a longer-term perspective, we will be able to do justice for this fund also.

Q: On a lot of spaces that you talked about such as retail, you already have some amount of exposure. Will it be the format now to shift focus on pockets like retail or education into this specific fund versus the others?

A: I was just giving examples. If our economy has to grow from USD 1 trillion to multi-trillion then there will be other sectors which will emerge such as broadband for example. As we move ahead, there will be many more new sectors and themes which will emerge. As the per capita income rises, as the affluent level rises, you will have many more opportunities.

Those names which I mentioned were more from an example perspective. It is going to be an interesting product. We will have the opportunity of taking a bet in a theme based sector. At the same time, we will try to capture the valuation gap.

Q: Where is the aggression in terms of chasing stocks that others maybe concerned about? In terms of valuations or in terms of size that you want to hold in the smallcap stories, where do you want to be a significant stakeholder?

A: We wanted to be very clear with our investors that this is going to be an aggressive product and volatile product. We have seen in the past that stock prices in the smaller companies stand to be very volatile. We want to be very clear from our investors' perspective that this is going to be a volatile product, it is an aggressive product and it is a high risk, high return product.

Over a period of time however, this volatility and this aggression evens out. We want to be very clear that this is an aggressive product and investors who were investing should be well aware that this is one high risk, high return kind of a product.

Q: What is the general pulse from retail now? Do redemptions continue at the pace that they have in the last four-five weeks? We have seen consistent outflows or selling from the mutual fund fraternity?

A: What we are seeing is redemptions definitely being there, but the fresh subscription which earlier used to nullify these redemptions are not coming. You have to look at it separately. I think fresh subscriptions are not coming for multiple reasons.

Regulation changes are one. Secondly the markets have moved up very swiftly. There is always a concern of double-dip somewhere in the world. Too many news flows, too many factors to track and I think that is dissuading fresh investments from coming in.

As far as redemptions are concerned if you look at it separately, there were a lot of investors who entered at the peak of 2007 and 2008. Whenever those investors tend to get near their purchase cost or just above their purchase cost, there is a general human tendency to redeem at first instance.

Our view is that from hereon the redemption pressure will start to ease off, hopefully. Investors are now starting to get a little more confident on the stability of the economy. Eventually we will start to see inflows coming in. As far as the systematic investment plan (SIP) is concerned, we are seeing nearly 70,000 to 1 lakh new investors being added on a monthly basis. This is a very healthy sign.

I have been on a road show for this fund. This has been one of the most unloved rallies where people are feeling left out. I think the realization is that now we have to start looking at investments in equity, from an asset allocation and a longer-term perspective is getting more and more prevalent. Over the long-term, these are healthy signs. Hopefully as time passes, you will see a lot more stability and a lot more inflows coming into the mutual fund industry.