PGIM Small-cap new fund offer review: Should you invest in it?

The fund house has been selective in rolling out new schemes and has stayed away from thematic offerings. However, small-cap investing entails high risk, which cannot be ignored

July 19, 2021 / 09:52 AM IST

Small-cap funds, on an average, doubled investors’ money over last one year, topping the performance chart among diversified equity schemes. These funds continue to get fresh investments. PGIM India Small Cap is the latest new fund offer (NFO). The NFO is open till July 23, 2021. Should you invest in it?

What’s on offer

The scheme will invest at least 65 percent of the assets in stocks of small-cap companies. The balance can be invested in stocks of other companies and in debt and money market instruments as well.

Anirudha Naha will be the equity fund manager of the scheme. The scheme’s performance will be benchmarked against the Nifty Small Cap 100 TRI.

What works

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The scheme will focus more on the fundamentals of each company, than looking at macro factors such as economic growth and sectoral trends. Small-cap companies are under-researched and can offer scope for healthy returns in the long term.

Small cap funds can offer meaningful diversification as well. Many sectors such as chemicals, auto ancillaries, paper, sugar, textiles are under-represented or have no representation among large cap stocks.

What doesn’t work

The timing of this new fund offer appears to be a bit of concern. Equity markets have seen a massive bull run since the trough in March 2020. Nifty small cap 250 TRI has given 202 percent returns from the low of 3614 registered on March 24, 2021. Increased participation from retail investors has inflated the prices of many small-cap stocks. In some cases, the valuations may not be sustainable.

But Naha is not worried. “Though we have seen small-cap stocks outperforming the Nifty over the last one year by a large margin, they have gone through a challenging period in the last five years. Demonetisation, GST and the COVID-19 pandemic have been challenging for many small-sized companies. Many of these companies have emerged stronger and the balance sheets are deleveraged, which may be beneficial during the economic upcycle,” says Naha.

As the economy unlocks, many consumer facing businesses may benefit from the opening up. Various government measures such as thrust on infrastructure spending, production linked incentive scheme may revive capital expenditure and manufacturing companies. Steady progress in vaccinations make economic recovery more sustainable. Many small cap stocks may benefit from this. However, a lot of these expectations are already priced in. Negative surprises may lead to volatility in stocks.

What should you do?

PGIM mutual fund appears to have turned around and got its act together. Its other equity funds have been doing reasonably well. The fund house has been selective in rolling out new schemes and has stayed away from thematic offerings. However, small-cap investing entails high risk, which cannot be ignored.

Vinayak Savanur, Founder and CIO, Sukhanidhi Investment Advisors says, “Wait till a new scheme build track record. Staying with schemes with good track record helps the investor to gauge how a strategy works in various phases compared to benchmarks and peers.”

Vishal Dhawan, Founder & CEO of Plan Ahead Wealth Advisors, says that PGIM Small cap Fund can be evaluated as an option after it builds a track record over three years. “Ideally go with funds with a longer track record, and through a gradual investment process such as SIP or STP to get the benefit of rupee cost averaging, as this category is prone to high volatility,” he adds.

Given that there are other small-cap funds with established track records, you can give this NFO a miss, for now. Let it gain some track record before you choose to invest in it.
Nikhil Walavalkar
first published: Jul 19, 2021 09:52 am

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