NFO review: Tata Small Cap Fund debuts as it's time for value picksAfter a gap of one year, the small cap funds space is seeing some new launches. Invesco Mutual Fund recently debuted a small cap fund. Now Tata Mutual Fund has launched its very own Tata Small Cap Fund. The NFO period is from October 19 to November 2.

Investors today are spoilt for choice in small cap funds arena. Including Tata’s product, there are 15 options. There are compelling funds like the HDFC Small Cap Fund, the L&T Emerging Businesses Fund, Franklin India Smaller Companies Fund, and the DSP Small Cap Fund.

So, what’s special about Tata Small Cap Fund? Read on to find out:

Small cap funds and valuation

It has been long argued that small cap stocks have become expensive. There is some truth in it, but as always like the rest of the things, the truth is somewhere in the middle. Small caps promise faster earnings growth and growth investors love that. The clear prevalence of multi-baggers in the small cap stocks field is also another reason most investors love them. Returns like 5X in 10 years and 10X in 10 years can’t be ignored.

Small caps are the 251st onwards stocks in the market capitalisation chart. Between January 2018 and August 2018, the small cap stocks have been punished as market correction set in. The froth that had developed in these pockets are being wiped off. This, Tata Mutual Fund, argues make small caps an interesting opportunity given the valuations have come off quite sharply.

For instance, price to earnings of 301-400 stocks on the market cap chart has dropped from 45 times to 40 times. For the 401-500 stocks on the same list, price to earnings has declined from 44 times to 31 times. So, this correction in small caps since January 2018 has presented an opportunity to pick quality stocks.

Most of the coverage in the markets is restricted to the top large and mid cap stocks and the coverage reduces substantially towards small cap stocks. This presents an opportunity to discover great businesses for investing which have the potential to grow manifold in the coming years.

More reasons for why a small cap fund now

In the last decade, India has seen a consistent growth year on year. Tata Mutual Fund argues that small cap stocks with strong businesses have also grown significantly in this time frame and have demonstrated the potential to keep growing in the coming years.

Also, as per the recent scheme reclassification within equity funds, large-cap companies are the top 100 listed companies based on the average full market capitalisation of the previous six months, mid-cap are in the 101st to 250th company, and small-cap are in the 251st company onwards. Tata MF feels that small cap universe is of much more high quality now than previously. As of June 2018, the 251st company had a market cap of Rs 9,849 crore. Interestingly there are 4826 companies in the small cap definition out of which almost 247 companies with a market cap between Rs 3,000 crore to Rs 9,849 crore. Tata MF thinks this presents a large opportunity of businesses to choose from with high corporate governance, strong balance sheets, and potentially high profit growth performance. There are many Indian and global MNC trading in the small cap space with a strong business profile.

Fund manager

The fund will be managed by Chandraprakash Padiyar, senior fund manager, who currently manages, Tata Hybrid Equity Fund and Tata Large & Mid Cap Fund. Most recently, he was with Alchemy Capital Management as portfolio manager for the onshore long-only strategies.

Fund benchmark

Nifty Small cap 100 TRI Index

Load Structure

Entry Load: Nil

Exit Load: 1% of the applicable NAV, if redeemed or switched out from the scheme on or before the expiry of 24 months from the date of allotment of units.

RupeeIQ take – Small cap funds are for investors who can really take a long-term approach. Minimum holding period should be 7-8 years. It’s going to be highly volatile so investors should be ready to ride the ups and downs in the portfolio.

Fund manager Chandraprakash Padiyar is not into taking short-term bets, and so is actually focussed on building a 30-35 stock all-weather small cap portfolio. We find the fund’s two years or 1% exit load in sync with its long-term bet on small caps. A new fund always has the zeal and passion to make its mark. On the other hand, Chandraprakash Padiyar’s track record with mutual funds will take some time to build given that he has recently joined Tata MF.

Download the scheme information document here

Disclaimer: Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on