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Tata Small-Cap Fund - Has Tata Mutual Fund Re-opened Its NFO Factory? - Outside View by PersonalFN

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Tata Small-Cap Fund - Has Tata Mutual Fund Re-opened Its NFO Factory?
Oct 31, 2018

Tata Mutual Fund has a history of launching numerous NFOs back-to-back in the past. With the launch of Tata Small-Cap Fund (TSF), Tata Mutual Fund is adding another fund to its table. Notably, the fund house had launched a Multi-cap Fund, a couple of months back in August 2018, apart from two other close-ended value style funds in June and July 2018

Tata Small-cap Fund is an open-ended equity scheme mandated to invest in companies that fall under the small-cap category. As per SEBI's mandate, Small-cap equity funds should invest at least 65% of their assets in stocks of small-cap companies. SEBI has classified small-cap companies as those that fall beyond the 250th stock in terms of full market capitalization.

Hence, TSF will allocate and incline its assets mainly towards equity and equity related instruments of small-cap stocks, while it could also invest up to 35% of its assets in equity and equity related instruments of other than small-cap companies. From an asset allocation standpoint and to mitigate the risk, the fund may also allocate some portion (up to 35% of its total assets) to debt and money market instruments and units of REITs and InvITs (up to 10% of its total assets).

Generally smaller than their mid-cap counterparts and in the initial development phase small-cap companies have the potential to grow multi-fold to become a formidable business entity. But, small-caps have the tendency to go from thrilling highs to dangerous lows. Moreover, its low trading volume due to their size brings along high liquidity risk. Thus, note that the risk associated with small-cap funds is far greater than mid-cap funds.

On the risk-return matrix, TSF is very-high-risk high-return investment proposition. It is suitable only for investors with a very aggressive risk profile and a time horizon of at least 8-10 years.

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[Read: Why Comparing Returns to Risk Is More Meaningful!]

Table 1: NFO Details

Type An open-ended equity scheme predominantly investing in small-cap stocks. Category Small-cap Funds
Investment Objective The investment objective of the scheme is to generate long-term capital appreciation by predominantly investing in equity and equity related instruments of small cap companies.

However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved. The Scheme does not assure or guarantee any returns.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans
  • Direct
  • Regular
Options
  • Growth*
  • Dividend (Payout# and Reinvestment)

*Default option
#Default option for Dividend

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

Bonus units and units issued on reinvestment of dividends shall not be subject to exit load
Fund Manager Mr Chandraprakash Padiyartd Benchmark Index Nifty Small-cap 100 TRI Index
Issue Opens 19th October 2018 Issue Closes 02nd November 2018
(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, the scheme's asset allocation will be as under:

Table 2: TSF's Asset Allocation
Instruments Indicative allocations
(% of total assets)
Risk Profile
High/Medium/Low
Maximum Minimum
Equity and equity related instruments^ of small-cap companies$ 100 65 High
Equity and equity related instruments^ of other than small-cap companies 0 35 High
Debt and Money Market Instruments including units of debt and liquid schemes of Tata Mutual Fund 0 35 Low to Medium
Units of REITs and InvITs # 0 10 Medium to High

$ Small Cap companies are those companies which are classified as small-cap companies by Securities and Exchange Board of India (SEBI) or Association of Mutual Funds in India (AMFI). At present Small Cap: 251st company onwards in terms of full market capitalization.
^ The Scheme will comply with all the applicable circulars issued by SEBI as regard to exposure to derivatives viz. SEBI Circular no. SEBI/MFD/CIR No. 03/ 158 /03 dated June 10, 2003, no. DNPD/Cir-29/2005 dated September 14, 2005, no. SEBI/IMD/CIR No. 9/108562/07 dated November 16, 2007, no. Cir/ IMD/ DF/ 11/ 2010 dated August 18, 2010.The cumulative gross exposure to equity, equity related instruments, debt, money market instruments and derivatives shall not exceed 100% of the net assets of the scheme. The exposure to derivatives will not exceed 50% of the net assets of the scheme.
The Scheme may invest upto 50% of the scheme's debt exposure in domestic securitised debt.
#A mutual fund may invest in the units of REITs and InvITs subject to the following:

  • No mutual fund under all its schemes shall own more than 10% of units issued by a single issuer of REIT and InvIT; and
  • A mutual fund scheme shall not invest
    • more than 10% of its NAV in the units of REIT and InvIT; and
    • more than 5% of its NAV in the units of REIT and InvIT issued by a single issuer.
(Source: Scheme Information Document)

What will be the Investment Strategy?

TSF will try to achieve its investment objective by predominantly investing in equity /equity related instruments of small-cap companies as well as a small portion in equity and equity related instruments of other than small-cap companies.

The focus of this Scheme is to provide investors with a reasonably diversified portfolio of small-cap stocks. The fund manager may invest across sectors, take cash calls, change allocation between the equity and fixed-income asset classes in a dynamic manner within the permitted limits and use derivatives for trading, hedging and portfolio balancing.

The Scheme may also invest some portion of the investible funds in debt and money market instruments including liquid and debt schemes of Tata Mutual fund as well as in hybrid instruments like REITs & InvITs.

The stocks under the Scheme will be selected after rigorous fundamental research based on the following parameters

  • Management competitiveness,
  • Business competitiveness,
  • Corporate governance,
  • Growth prospects,
  • Past track record, etc.
Figure 1: Investment Strategy Explained
(Source: Tata Small-cap Fund Presentation)

As can be seen from the given diagram, the TSF's investment strategy is like a filtering process, where the fund manager will aim to arrive at a core set of stocks offering long-term opportunities, strong market position and business with compounding characteristics. It will further follow 5-point evaluation process (using the quantitative and qualitative aspects of the companies) to arrive at the final list of stocks for the portfolio. Using the tactical opportunity set, the fund will aim for above-average returns for investors.

Who will manage TSF?

TSF will be managed by Mr Chandraprakash Padiyar.

Mr Padiyar recently joined Tata AMC as a Senior Fund Manager. He is an MBA (Finance) from Symbiosis Institute of Business Management and has cleared all 3 levels of CFA program from the CFA Institute.

Mr Padiyar has over 18 years of work experience in Equity research. Before joining Tata Asset Mangement Ltd in September 2018 as a Senior Fund Manager of Equities, he has worked with Alchemy Capital Management Pvt. Ltd. as Director and Portfolio Manager for on-shore long-only strategies for over a decade.

Some of the other Equity schemes he has been assigned to include Tata Hybrid Equity Fund, Tata Large & Mid Cap Fund and Tata Offshore India Opportunities Scheme.

The outlook for Tata Small-cap Fund:

TSF will strive to achieve the investment objective of capital appreciation by predominantly investing in equity/equity related instruments of small-cap companies.

Based on the fund strategy of stock selection of small-cap companies, the fund manager will try to maintain the investment objective of the scheme.

The rationale behind investing in small-cap stocks is that they have increased over the years and have managed to perform better than the large-cap funds despite the higher risk involved as mentioned in the brochure "Small-caps compared to Large and Mid-caps have a higher spectrum to grow in every aspect of a business"

Figure 2: Small-cap Investing is based on:
(Source: Tata Small-cap Fund Presentation)

In the current market conditions where small-cap and mid-cap companies are beaten down and so have large-caps toppled; it provides an opportunity to do some value buying to the fund manager. However, amidst the extreme turbulence constructing the portfolio would be a challenging task for the lead fund manager, and if the Indian equity markets hit more turbulence ahead that may inflict on extremely-high-risk.

Amidst the macroeconomic uncertainties looming, the fortune of the fund would be closely linked to how the fund manager plays the investment strategy in the endeavour to accomplish the investment objective of TSF.

[Read: Skip NFOs, Instead Consider Building A Strategic Mutual Fund Portfolio]

Editor's note:

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Author: PersonalFN Content & Research Team

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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