The SBI scheme will accept lumpsum investments till the receipt of net inflows is worth Rs 1000 crore
Country’s largest fund house SBI Mutual Fund has announced that SBI Smallcap Fund is accepting fresh lumpsum investments from March 30. They can include additional investments or switch in. Another fund-house, DSP MF has also opened its DSP Smallcap Fund for investments from April 1. With smallcap stocks valuation at multi-year low thanks to coronavirus triggered market crash, should you invest in them? Read on to know.
(Updated on April 1: Nippon India Mutual Fund announced on April 1 that it has removed the subscription limits or restrictions on its small cap fund Nippon India Small cap Fund. It will be effective from April 3.)
Smallcap funds need to maintain an optimum size to perform. This is because such funds deal in smallcaps, which are by far the most illiquid stocks in the market. This becomes more evident during downfalls when many smallcap stock counters see only sellers. Exiting a smallcap stock is tough. So, smallcap funds do not build large positions. They want to keep the agility of entering and exiting fast without meaningfully ramping up the impact cost. So, each smallcap fund tries to operate at a definite size. SBI Smallcap Fund, as on Feb-2020 end, had Rs 3,400 crore assets. Since the market has corrected quite a bit since then, SBI Mutual Fund decided to open gates to lumpsum investments to regain a similar size (pre-correction).
Based on market conditions and capacity constraints in order to manage the fund efficiently, SBI Smallcap Fund will accept lumpsum investments till the receipt of net inflows upto Rs 1,000 crore from the date of opening i.e. March 30, for lumpsum subscriptions. Restrictions to SIPs and STPs remain. Lumpsum investments help a fund gain inflows much quicker than SIPs, which accumulate only over a period of time. This means investors virtually have a small window to participate.
In DSP Smallcap Fund, with effect from April 1, 2020, all lumpsum investments / subscriptions including all systematic investments in units of the scheme shall be accepted. The fund had a size of over Rs 5,000 crore as on Feb-2020 end.
Market movements can be grouped into four phases: lead-in, capitulation, consolidation, and reflation. In the lead-in phase, interest rate sensitives and mid and smallcaps get sold off. In the capitulation phase, all sectors fall. In the consolidation phase, cash-rich bounce first, financials last. In the reflation phase, all rise. The rally is the sharpest in metals, midcaps, smallcaps, etc.
Where are we now? Experts say Indian markets are somewhere between capitulation and consolidation. Given this, there is no sharp bounce back for smallcaps in next few months. That said, smallcap valuations are extremely attractive, even more so after the coronavirus-led correction.
For investors with at least 5+ years time, this may be a good time to build positions in hand-picked smallcaps that a mutual fund manager will select. SBI Smallcap Fund, managed by R Srinivasan, has shown that its portfolio has done better than many others. In the last one month, when top smallcap funds have fallen between 35-40%, the SBI Smallcap Fund has dropped just 27%. In the last one year period, the fund is also the 3rd best performer. In fact the fund is the best performer in last five year period and also in the last 10 year period.
DSP Smallcap Fund, co-managed by Vinit Sambre, Jay Kothari and Resham Jain, is not in the same league, at least currently, as the SBI MF scheme. It was once popular but hasn’t lived upto to the great expectations of investors of late. In the last one year period, it has lost nearly 30% of value, 12% loss in three year period and almost flat in the 5-year period. This is below category average for respective periods. The fund can be a potentially good choice for investors with high risk appetite. The fund’s recent rough patch can swiftly change course, given Sambre’s stewardship who has been with the scheme since 2010.
Smallcaps are not a homogeneous basket with common characteristics. Not all smallcaps are investible. This is why you are better off investing your money in a smallcap fund with a sustained good track record.
We are more comfortable with SBI Smallcap Fund than DSP Smallcap Fund.
You should invest only if you have more than five years. A very high AUM in a smallcap fund isn’t good, because that aggravates liquidity risks, reduces the investible universe and increases the number of holdings.
You should ideally do a proper asset allocation to decide how much of your money should go into smallcaps. Try not to over-board in your enthusiasm.
If you feel smallcap funds are not your cup of tea at the current juncture, try to invest in multicap funds where the fund manager is free to take a call on which side of the market he/she wants to go heavy on.
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