Investments in small cap companies tend to be more volatile than large cap and mid cap companies. Nevertheless, given the unpredictability and volatility of returns in equity markets, it is a prudent strategy to hold a diversified portfolio of equity investments. And investing in small cap stocks can provide that necessary diversification within an investors’ equity portfolio as it adds a high risk strategy to balance an overall conservative portfolio construct.
This means active small cap funds can provide diverse opportunities across sectors and exposure to niche, new and emerging business models. Most importantly, small cap stocks provide exposure to under-researched, under-owned and untapped opportunities. This places small cap funds in a sweet spot, particularly at a time when the markets are witnessing a broad-based rally and there are still pockets and segments of opportunities that could provide both valuation comfort as well as considerable growth opportunities.
If you are looking for a small cap fund, you can zero in on UTI Small Cap Fund. NFO of the fund starts from December 2.
Fresh start
Given that the fund will start in a post covid world, it can tap into the new realities and new possibilities with ease. Moreover, there are no size constraints as well, which can be crucial in tactical allocation.
Bigger funds in the category often have restrictions on inflows. Higher size and increasing inflows mean it is difficult to find quality opportunities in the small-cap space and also not easy to deploy money or exit stocks without incurring heavy impact cost. UTI Small Cap Fund being a new offer can fully benefit from exploring the opportunities without much limitations.
Investment strategy and risk mitigation
The fund's investment strategy is to pick companies that have scalable business models, are run by seasoned management and generate high return on invested capital. The fund would pursue a pure bottom-up approach for stock picking, therefore agnostic to sectors.
At the same time, the fund will use the 360⁰ risk assessment framework that enables the fund to mitigate the underlying risks. Here is how it will work:
- Research framework. In-house proprietary research process and methodology “ScoreAlpha” helps in consistently identifying good stocks and avoid poor stocks. The fund would also have the blend of both growth and value investment style with a tilt towards growth.
- Diversified portfolio: Maintain judicious portfolio diversification across stocks and sectors. The fund would have 60-70 stocks in the portfolio across the sectors.
- Position sizing: Based on the relative conviction, market depth and overall stock level risks, the fund would have a cap of 5% allocation at stock level.
Key takeaways
- As the fund starts its journey in a post covid world, it can tap into the new realities and new possibilities with ease
- Unlike bigger funds in the category that have restrictions on inflows, the new fund has no size constraints
- Well placed to absorb considerable inflows and invest in untapped and under-owned opportunities
- 360⁰ risk assessment framework to mitigate the underlying risks
- Suitably placed to add a high risk strategy to balance an overall conservative portfolio construction and offer the necessary diversification in your client's portfolio
