Mutual funds Principal Mutual Fund is launching a new fund namely Principal Small Cap Fund, an open-ended equity scheme predominantly investing in small cap stocks. The NFO will open for subscription on 22nd April 2019 and will close on 6th May 2019; the fund will reopen on 15th May 2019.

Principal Mutual Fund rarely launches new funds, since they introduced the last NFO in April 2016. Looking at the attractive opportunities in small cap space and their proven track record of managing such funds Principal MF has introduced this fund.

There are total 20 funds in the small cap category with the AUM of Rs 44,090 crore. Reliance Small Cap Fund has the highest AUM of Rs 8,300 crore. Small Cap stocks have corrected significantly in the past year. Best performing fund in this category, Axis Small Cap Fund delivered -1.77% returns over 1-year period. While the category has delivered -12.0% returns on 1-year basis (as on 17th Apr’19) and CAGR returns of 12.61% over a 3-year period. This correction has opened up a host of opportunities in this space and that’s the reason we see AMCs aggressively pushing their small cap funds.

Principal AMC believes small caps have potential to grow exponentially due to presence not only in large organised sectors but also in sectors where large and midcaps have limited presence. Small cap stocks, to an extent, represent emerging industries. Investors can probably expect better appreciation as these companies are mostly under-researched and under-owned by institutional investors.

 Asset Allocation and Strategy

Instruments Indicative allocations (% of total assets) Risk Profile
Equity and equity related instruments of small cap companies 65-100% High
Equity and equity related instruments of companies other than small cap companies 0-35% High
Debt and Money Market Instruments including units of debt & liquid schemes 0-35% Low to Medium

The fund house will do bottom up stock picking. They have shortlisted an investment universe of 200 small cap companies from almost about ~4,750 companies. This shortlisting is done basis company’s track record and growth outlook, quality of management and liquidity in the stock market.

The fund house has also introduced two special facilities – 1) STEP or Smart Trigger Enabled Plan & 2) Auto Trigger

STEP Facility – Smart Trigger Enabled Plan protects your investment against sharp fall in markets as investment is made in 4 instalments. It is similar to the STEP facility introduced under Edelweiss Small Cap Fund in February this year. This facility is available for investors exclusively in the NFO period of Principal Small Cap Fund.

Here’s how STEP works:

On Allotment
– May 2019
25% Units of Principal Small Cap Fund allotted and balance 75% is invested in Principal Cash Management Fund
Month – Jun’19
1st STEP 25% 3% fall in Nifty Small Cap 100 Index from the date of initial allotment or last business day of the Month (If STEP did not activate during the month)
Month – Jul’19
2nd STEP 25% Further 3% (Total 6%) fall in Nifty Small Cap 100 Index from the date of initial allotment or last business day of the Month (if STEP did not activate during the month)
Month – Aug’19
3rd STEP 25% Further 3% (total 9%) fall in Nifty Small Cap 100 Index from the date of initial allotment or last business day of the Month (if STEP did not activate during the month)

* Includes any rise or fall in the value of investment

Auto Trigger – Under this facility, investors can auto switch the investments made in this fund to any other Principal Fund of their choice, on reaching the desired appreciation. For e.g. If you want your investments to grow by 13% and once that threshold is achieved switch this investment to a safer product, you can give this instruction at the time of investment. Your money will be auto transferred on achieving 13% gains. You might as well reinvest your money back in Principal Small Cap Fund.

Principal Small Cap Fund is benchmarked against Nifty Small Cap 100 Index. The index has delivered -17.48% returns on 1-year basis and 9.96% returns on 3-year basis as on 12th April 2019

The fund will be jointly managed by – PVK Mohan (Head – Equity) and Siddarth Mohta (Associate Fund Manager). Mohan has over 25 years of experience in Indian Equity Markets. He is managing several other funds like Principal Multi Cap Growth Fund, Principal Tax Savings Fund, Principal Balanced Advantage Fund (Equity Portion) Principal Hybrid Equity Fund (Equity Portion), Principal Personal Tax Saver Fund, Principal Equity Savings Fund (Equity portion) and Principal Retirement Savings Fund.

Mohta has 14 years of experience as an Equity Analyst/Finance Manager. He is managing one other funds of the fund house, Principal Multi Cap Growth Fund.

Tax Impact

The fund will be eligible for Long Term Capital Gains tax of 10% for holding period of more than one year and gains exceeding Rs 1 lakh. Short Term Capital Gains tax of 15% will be levied for less than 1 year holding period.

Key features of the Fund,

NFO Period: 22nd-April-2019 to 6th-May-2019

Type of Scheme: An Open-Ended Equity scheme predominantly investing in small cap stocks

Benchmark: Nifty Small Cap 100 index

Min Application Amount: Rs 5,000 and in multiples of Re. 1/- thereafter.

STEP – Rs 25,000/-

Systematic Investment Plan: Minimum twelve instalments of Rs. 500/- each

Systematic Transfer Plan: Minimum Six instalments of Rs. 1,000/- each

Regular Withdrawal Plan: Minimum Six instalments of Rs.500/- each

Plans and options: Regular & Direct Plans Under which following Options are offered

– Growth

– Dividend

Exit Load: 

If redeemed/ switched on or before 1 year from the date of allotment

  • Nil for redemption/ switch out of units up to 25% of the units allotted (the limit) –
  • 1% on redemption in excess of 25% of the limit stated above – Redemption of units would be done on First in First out Basis (FIFO)
  • Nil thereafter

Risk Profile: Moderately High Risk

Investor Suitability: This product is suitable for investors who are seeking

– Long term capital appreciation

– Predominantly investment in equity and equity related instruments of small cap companies.

RupeeIQ Take: Time is indeed ripe to benefit from investing in the small cap space. That’s why fund houses are either launching a small cap fund or promoting the existing product. Investors must definitely take advantage of this opportunity to invest in this segment. However, you may need to find a fund house that has a proven track record of researching and selecting good companies before they become famous. Principal MF’s Principal Emerging Bluechip Fund is a testimony of their stock picking ability, the fund has delivered ~20% CAGR returns since its inception in 2009. Investors who already have some exposure to equities may look at this fund. We recommend a small allocation for 5 year and above period for retail investors.

Also read:

Principal Emerging Bluechip Fund turns Rs 10 lakh into Rs 1 crore in a decade

Priyanka Bharati

Priyanka Bharati is a senior personal finance analyst with RupeeIQ. She can be reached on