Is small beautiful?

Its a rare thing to see a new fund offering NFO from a mutual fund in India these days....

Its a rare thing to see a new fund offering NFO from a mutual fund in India these days. After the market regulator banned entry load on mutual fund schemes and tweaked the norms,the market hasnt seen many NFOs. As a result,inflows into the mutual fund industry have dried up over the last several months. Braving the inclement weather,Reliance Mutual Fund RMF,the biggest fund house in India in terms of assets under management,is coming out with its Small Cap Fund to keep the growth momentum going.

This is the first dedicated small cap focused product from RMF. The product is being launched at a time when the Sensex has gone above the 18,000 level to a new 30-month high and most of the big cap stocks have reached their recent highs and theres very little scope for a further rise in valuation at the current earning levels. But small-cap segment is a dangerous territory which can destroy investor wealth if stock selection is not done properly.

WHATS THE PRODUCT

The new open ended fund will have a pre-dominant investment focus on small cap companies where stock selection would play a key role. The scheme proposes to invest at least 65 per cent of the corpus in equity and equity-related instruments of small cap companies,which may go up to 100 per cent of the corpus. Investment in equity and equity-related instruments of any other companies,including derivatives,other than small cap companies will be in the range of 0-35 per cent. The scheme has both growth and dividend option. Dividend option offers payout and reinvestment facility.

The minimum investment amount is Rs 5,000 and in multiples of Re 1 thereafter. Entry load is nil for the scheme as per the SEBIs guidelines,whereas the exit load is 2 per cent for holding period less than or up to 12 months and one per cent for holding period above 12 months and nil thereafter. This fund will offer an auto switch facility from Reliance Liquid Fund 8212; Treasury Plan to Reliance Small Cap Fund during the NFO. The funds performance would be bench marked against BSE Small Cap Index.

BIG PROBLEMS OR TOMORROWS LARGE CAPS

On paper,many small caps are potential large caps of tomorrow because of their benefit of high growth prospects. Many of the big caps on the market now were small caps years ago. Investors who stuck with these stocks have benefited immensely over the years. On the other hand,many small caps have disappointed the investors as well. As a market source pointed out,The main issues among small caps are the quality of corporate governance standards. Lot of small caps follow the Sebi and listing norms

by letter,but not by spirit. Weak audit quality,poor track record of independent directors,related party transactions and mismanagement have destroyed investor wealth in small cap companies.

The Bombay Stock Exchange BSE alone has nearly 5,000 listed companies with majority of them being small caps. The quality of some of these small caps are questionable. The efficiency of the fund manager will be keenly watched as any misjudgment will cost the investor dearly.

HIDDEN POT OF GOLD

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The BSE Small Cap Index has gained 42 per cent to 9,759.81 in the last one year. This is a good performance by small caps as the Sensex read large caps has gained only 15.5 per cent at 18,179.64 during the same period. Valuation gap is also visible between small caps and large caps thus giving an opportunity for alpha creation. In todays economic environment,we see individuals with entrepreneurial mindset are exploring new business opportunities,which have the potential to grow faster. With presence in all emerging sectors of India,small cap have the ability to become multi baggers,which are a true reflection of entrepreneurial spirit,new opportunities and creation of global behemoths, says Sunil Singhania,fund manager for the Small Cap Fund.

If the samll cap segment repeats the performance in the next 12 months,investors who put money in RMFs proposed fund will smile all the way to their banks. The NFO would be open from August 26 to September 9,2010.

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