SBI Small and Midcap Fund stopped accepting fresh inflows on October 30th, 2015 because it simply got too big, too fast. The fund’s old Scheme Information Document (SID) had a capacity constraint of Rs 750 crore built into it and that upper limit was hit. The fund house closed the scheme to fresh investment (including SIPs) but allowed existing SIPs to continue. The fund had risen by 34% in just the first eight months of 2015.
Now it will reopen to fresh SIPs (Systematic Investment Plans) on 16th May 2018 but not for fresh lump sum investments. It will have an investment cap of Rs 25,000 per month per PAN number.
As of 7th May 2018, SBI Small and Midcap Fund had a five year annualized return 36% and a three-year return of 27%. However, the fund that reopens to inflows will be a different animal. It will reopen as ‘SBI Small Cap Fund.’ The old capacity constraint of Rs 750 crore has been removed. The previous fund mandate required the fund to invest 90%-100% of its assets in equity. This has been revised to 65%-100%.
The fund has been placed in SEBI’s small-cap fund category meaning that it must invest 65% of its assets in companies below the top 250 companies by market capitalisation. The old mandate specified a small cap allocation of 50-70%, a mid-cap allocation of 30-40% and a large-cap allocation of 0-20%. However, it defined midcaps as those between the 101st to the 400th largest company by market cap and small caps as any stock beyond the 401st largest. The new SEBI definition puts small caps at those below the top 250, a much higher threshold. This will go some way to address concerns about the fund being forced into much smaller companies than what it was previously allowed to buy.
The fund that reopens to investment will in some ways be ‘less risky.’ It will be allowed to use more debt than before to mitigate risk. The change in name from mid and small cap to ‘small cap’ is counteracted by the fact that small caps are defined at a higher threshold. Its fund manager, the person responsible for the incredible ride over the past few years, R Srinivasan, remains in place.
However, investors must note that less risky does not mean ‘no risk.’ Small-cap funds are typically the most volatile among the different equity fund categories. The market valuation and earnings prospects are also vastly different in 2018 from what they were when the fund closed itself to subscriptions in late 2015.
Investors should not rush into the fund when the gates reopen. The fund has been immensely successful but its closure was largely the result of an artificial upper limit of Rs 750 crore built into its SID. That SID has now been changed in the ways described above. Those who do wish to invest should have a time horizon of more than five years and a high risk appetite.
The S&P BSE Small-Cap Total Returns Index will remain the benchmark of the fund. A total returns index includes dividends and assumes that dividends have been reinvested back in the index.