Sundaram BNP Paribas Mutual Fund has launched Sundaram Select Small Cap Fund (SSSCF) - a close-ended equity scheme, which as the name suggests will invest predominantly in small cap companies.
Small cap companies, by definition are riskier investments, where the return could be very high, at the same time; the risk of capital loss is also higher as compared to a large cap fund. Hence, experts believe that risk averse or conservative investors should a such funds.
Sundaram MF too is of the same opinion, as S Vaidya Nathan, Head, Product Management, on behalf of the fund says, "The fund is designed only for investors who can retain exposures for a five-year period. We believe such a period is necessary for small-cap stocks to deliver value."
But, is it advisable for an investor to invest all his/her money in this scheme? Investment expert Hemant Rustagi says, "Small cap stocks, by nature, are the riskiest among all the three segments of the market. Therefore, the product is suitable mainly for those investors who have an existing portfolio and have adequate exposure to large and mid-caps, and is willing to take risks associated with investing in small cap stocks to improve the portfolio returns."
Sundaram MF supports this view as Vaidya Nathan emphasizes that investors clearly should allocate only a small part of their portfolio to this high-risk, high-return product. The fund is appropriate for investors who:
- Have a high-risk appetite;
- Understand the risks involved;
- Seek an aggressive equity fund that could boost overall portfolio returns;
- Have the ability to absorb risks of investing in mid and small-cap stocks;
- Seek long-term capital appreciation to meet financial goals;
- Have a sizeable allocation to equity in their portfolio;
- Have an investment horizon of at least three years and preferably five years;
- Allocate a part (say 5 to 10%) of their equity exposure to the fund.
The scheme's long-term commitment, the overall limit set on money to be raised via the new fund offer, and Sundaram's impressive performance track record are other unique features that have impressed experts.
Long-term Commitment:
The scheme allows investors to exit, every second and fourth Friday of the month. But in any given year, the investor can redeem only up to a maximum of 10% of his original investment (and a minimum Rs 1000). Even in this case the exit load is very high to discourage investors from getting out.
Investor expert Sandeep Shanbhag says, "This means two things: (1) The scheme will largely attract long-term investors 2. The fund manager would have long-term funds at his disposal without having to worry about funding frequent repurchases."
Limit on what the scheme plans to mop-up:
There is an overall limit to what the scheme plans to raise. The maximum limit is fixed at Rs 330 crore (Rs 3.30 billion).
"We have seen in the past that funds that keep getting larger eventually seem to run out of good investment opportunities. Then to invest the marginal money that keeps coming in, the fund manager is forced to go down the quality ladder of eligible investments, says Shanbhag.
Vaidya Nathan of Sundaram MF adds, "The fund size has been fixed at Rs 300 crore and even the 10% green shoe is only for operational reasons, as it may tough to precisely cut over at the maximum limit. We will not retain an extra rupee than what has been indicated, as we believe such a size is appropriate to construct a genuinely small-cap portfolio that can provide optimum returns. The closed-end structure will ensure that pressures of inflows are a ed and that of outflows is minimized by stringent exit norms."
Performance track record of existing Sundaram MF schemes:
The new scheme's key to success would be the ability of the fund manager to select the right companies in this segment. And given that this new scheme is managed by Anoop Bhaskar, who also manages Sundaram Select Midcap Fund, which has been so far highly successful, it would be reasonable to expect good results in this one too, feel experts.
To sum:
Experts believe that Sundaram Select Small Cap Fund is one of the few NFOs that offer some unique features to the investors which will be beneficial to them in the long run. However, on account of the inherently risky nature of the product, investors should carefully gauge their risk- taking ability before investing.
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