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Edelweiss Insights Small cap in small steps, says Edelweiss MF

Small cap in small steps, says Edelweiss MF

‘After 28% correction in small cap index, investments in small cap stocks is an attractive proposition.'
Team Cafemutual Jan 30, 2019

Small caps have corrected sharply in the last one year. Sensing opportunity in this space, Edelweiss MF recently launched an NFO - Edelweiss Small Cap Fund. (NFO period January 18, 2019 to February 01, 2019). The scheme aims to cherry pick winning ideas in the small cap universe – shared the fund house.

Talking about the rationale behind launching the fund, Edelweiss MF shared that historically investing in small caps has been rewarding post a correction. In the last one year, 25% small-cap stocks have fallen more than 50% while 53% small-cap stocks have fallen more than 30% from their peak. Thus, there is significant opportunity to invest in strong companies at attractive prices.

Talking about the small cap space, the scheme’s fund manager and CIO - Equity, Harshad Patwardhan, shared that as per SEBI definition small cap stocks are the ones which rank below 250 in terms of market capitalization. This makes the universe particularly diverse in terms of investment opportunities. Typically, stocks in this segment tend to be under researched and under owned.  Identifying winning ideas in this space therefore has huge potential to generate alpha, said Harshad.

Harshad also shared three investment ideas unique to this segment. Themes which will do well over the medium to long term according to him.

  1. Industrial or infra sector: Acceleration in this category is linked to economic growth.  Small cap stocks account for 69% of companies and 27% of market cap in this space.
  2. Chemical companies: Gaining market share from China, 83% of listed chemical companies are small-caps accounting for 50% of market cap.
  3. Staffing companies: These companies are growing at a rapid pace. Two thirds of the companies (both in terms of numbers and market cap) are small-caps.

While the fund house is bullish about the growth in this category in the medium to long term, in the near term they expect macroeconomic factors and upcoming general elections to influence market sentiments. To ride the volatility in this space, the fund offers investors an option to split their NFO investments into five equal installments. Edelweiss MF has christened this facility Smart Trigger enabled Plan (STEP), which will be available only during the NFO period. Investors opting for this facility will invest only 20% of their investment in Edelweiss Small Cap Fund during the NFO period. The remaining will be invested in Edelweiss Liquid Fund. Each month 20% of the amount will be transferred from the Edelweiss Liquid Fund to the Edelweiss Small Cap Fund on occurrence of trigger event (i.e. correction in Nifty Small Cap 250 Index) or at month end. Over the next four months the entire corpus will be invested in the Edelweiss Small Cap Fund.     

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