This segment offers greater flexibility to fund managers as the number of companies is larger
Even as retail equity investors press the panic button due to a global sell-off following the outbreak of the coronavirus disease (Covid-19), Indian fund houses have been shopping for stocks
that have become cheap. Small-cap funds that had earlier shut their doors for further subscriptions are now opening their doors once again. SBI Small Cap fund, with assets worth Rs 3,476 crore (Feb 2020), opened for fresh lump-sum subscription on March 30. The fund will accept inflows up to a maximum of Rs 1,000 crore overall. In November 2019, it had allowed investors to invest through systematic investment plan (SIP) up to a limit of Rs 25,000 a month and per Permanent Account Number (PAN) – that route that is still open.
DSP Small Cap Fund (DSCF) will also accept lump-sum investments, effective April 1. Not to be left behind, Nippon India Small Cap fund (NISC) too is opening its doors for lump-sums from April 3. Already, it had started to accept lumpsum investments up to a limit of Rs 5 lakh from March 17. Further market corrections after that, led the fund house to lift the limits, including on SIPs (systematic investment plans) and STPs (systematic transfer plans).
SBI Small Cap Fund last shut its doors in October 2015, when its corpus was a mere Rs 714 crore. It opened for SIP inflows on 1 November 2019 when its corpus had reached Rs 3,035 crore, as per data by Value Research. By the end of February 2020, its corpus was Rs 3,476 crore.
By contrast, NISC’s corpus was Rs 8,567 crore as on February 2020.
Discount sale on equities
Small-cap stocks continue to get badgered on the stock markets, as they were for much of 2019 and more so this year. The BSE Small-Cap index has fallen by nearly 32 percent year-to-date. The BSE Mid-Cap index and BSE Sensex declined 31 percent. Fund managers say that many sectors and companies are now available at attractive valuations. Manish Gunwani, chief investment officer-Equity investments at Nippon India mutual fund says, “Many asset-based companies such as state-owned firms and cash-rich companies with high dividend yields are now available at good valuations after the corrections.”
Manish says that he is “quite bullish” on small-caps given that this segment offers greater flexibility to fund managers as the number of companies is larger. The Securities and Exchange Board of India (SEBI) has stated that the 100 largest stocks by market capitalisation on the stock exchange are to be classified as large-cap stocks. The next 150 companies are classified as mid-cap stocks. The remaining firms are small-cap stocks. As a result, and as per data put out by the Association of mutual funds of India (AMFI; the MF industry’s trade body) – the average market capitalisation of small-cap stocks is less than Rs 9,000 crore. That is partly why mid-cap funds find fewer ideas to move around as opposed to small-cap schemes.
Fund managers need to be cautious in the small-cap segment, so as to avoid leveraged companies.
Ravi Kumar TV, Director, Gaining Ground Investment Services says, “Companies with relatively lower levels of debt or no debt will bounce back when we see a recovery. So would those with ample cash and strong balance sheets. Fund houses that have opened the gates of their small-cap schemes are seeing the opportunities in this space.”
Should you invest?
After a long time, the move to accept fresh investments of large sums shows that fund managers are confident of picking up quality stocks at reasonable valuations in these markets. “Industry participation has been less in small-cap stocks. There is huge scope, as valuations have come down in a lot of in small-caps,” says Ravi.
Some advisors believe that when markets pick up, large-sized companies will recover first. Srikanth Bhagavat, managing director, Hexagon Capital Advisors Pvt. Ltd has advised his clients to go a bit aggressive in equities, but stick to mostly large and multi-cap funds. “These funds look better on a risk-reward basis. Large businesses will spring back quicker. The stress on the economy is going to be pretty severe and smaller companies will have a tough time going ahead”, says Srikanth.
It's wise, therefore, to not go overboard on small-cap funds, even though there’s no denying the existence of opportunities in this segment. Also, it makes sense to stick to SIPs. If you have a lump-sum, deploy it through STPs spread over two months. Deepak Chhabria, CEO and Director, Axiom Financial Services says that the sell-off in equities is not yet over. When markets rise again, he says, there could be a second round of selling and then again markets may go down. “Of the incremental money that you wish to put in equities now, have a small allocation in small cap funds. Of this small-cap fund allocation, invest around 25 percent now as lump-sum. Use the rest to do an STP so you can stagger your purchases.”It is indeed a good time to invest in equities.