Playing the widening gap between the valuations of large and small cap stocks, IDFC Mutual Fund has announced the launch IDFC Emerging Businesses Fund, its small cap fund. The fund will be managed by Anoop Bhaskar. The New Fund Offer (NFO) will run from February 3th to February 17th and being open ended the fund will be available for subscription thereafter.
In its presentation, the AMC has proposed several reasons why investors should invest in the IDFC Emerging Businesses Fund. The AMC notes the price correction in this space compared to large caps and the attractive valuations in it, compared to historical levels. “The principal reason for investing in this fund is small cap valuations. Timing small cap investments could be as critical as time in the market," said Anoop Bhaskar, Head of Equity at IDFC Mutual Fund. The AMC presentation also points out that the small cap space is wide, encompassing about 4,750 listed companies compared to about 250 companies in the large and mid-cap space. Finally, IDFC AMC also notes that actively managed small cap funds have beaten their benchmarks in much larger numbers than large cap funds. This is borne out in the S&P Dow Jones SPIVA Report will compares active and passive funds. According to the SPIVA report as of June 2019, only 19% of small cap funds were beaten by their benchmarks compared to 77% of large cap funds in the past 1 year. The figures are similar over longer periods where 27% of small cap funds were beaten compared to 66% of large cap funds.
Distinguishing the new offering from IDFC Sterling Value Fund, a spokesperson for IDFC AMC said that IDFC Sterling Value (a Value Fund) does not have any predetermined percentage allocation to the small cap space. IDFC Emerging Businesses Fund will have to allocate at least 65% of its corpus to the small cap space. Furthermore IDFC Sterling Value looks for opportunities in the mid and small cap space while IDFC Emerging Businesses will focus on the small cap space.
Traditionally investors wait for a fund to establish a track record before investing. IDFC AMC has urged investors not to do this. “We would encourage investors to invest through lump sum and STPs of not more than 6 to 9 months. We believe that equally weighted SIPs of 3 to 5 years would come in too late to catch the favourable cycle. This may not be the most optimum way of investing in small caps," said Bhaskar.
Financial planners have come out in favour of the launch. “IDFC has expertise in the small cap space and Anoop Bhaskar is a capable fund manager," said Bhavik Dand, a Mumbai based Independent Financial Advisor. “Small cap valuations also look attractive. People who do not have small cap exposure can look at this fund," he said. However investors should wait for a fund to establish a track record before investing unless the product is unique in nature. This (uniqueness) is not present in the case of IDFC Emerging Businesses Fund.