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NFO: Things to know before you invest in Principal Small Cap mutual fund

Sunil Dhawan
Mutual Fund NFO, NFO, small-cap funds, Principal Small Cap Fund, open-ended equity scheme, MF, MF Trigger, equity fund

A new fund offer (NFO) from Principal Mutual Fund AMC has hit the streets and is primarily for the investors with an aggressive risk profile. Principal Small Cap Fund, an open-ended equity scheme predominantly investing in small-cap stocks, will have its NFO period between April 22nd and May 6th, 2019, while the units will be available for regular subscription or transfer from May 13, 2019. The scheme will be benchmarked to Nifty Small Cap 100 Index.

What is unique about Principal Small Cap Fund is that exclusively during the NFO period, the fund house is offering a mechanism to stagger one’s investment into the market and not invest in a lump sum. Such a facility called Smart Trigger Enabled Plan (STEP) is aimed to protect the investment against any sharp fall in the stock prices. This approach helps to avoid any kind of market timing.

How funds are invested in STEP facility

Through STEP facility, the investment in NFO is not put into entirely into the markets. Instead, the total investment will be spread across 4 equal monthly installments. Initially, only 25 per cent of funds will be deployed up front in the Principal Small Cap Fund. The balance of 75 per cent of the invested amount will be kept in the Principal Cash Management Fund.

Thereafter, if the index falls 3 per cent from the fund’s allotment date, the STEP facility will get activated and automatically 25 per cent of the initial investment to Principal Small Cap Fund will get allocated to the stocks. However, if there is no change in the index level, the switch will take place on the next month end from Principal Cash Management Fund to Principal Small Cap Fund. This process continues every month till all 4 installments are allocated into stocks in a staggered manner. The STEP facility is available for a minimum investment of Rs 25,000 otherwise the fund has a minimum subscription amount of Rs 5,000.

The trigger feature

Principal Small Cap Fund will also carry another feature called Auto Trigger. Using the Auto Trigger facility, an investor can set a target rate of return for oneself. As and when the target is met, the gains will get automatically shifted to another fund. Such a feature helps investors to automatically rebalance their equity exposure to Small Caps in their portfolio.

How small caps fared

The data as per Valueresearchonline shows that as on 25th April, the one year return of small-cap category ranges between negative 2 per cent to negative 23 per cent. With such a big variation in returns, selection of the right small cap fund or funds becomes highly important. However, expecting high returns in a short period is also not the right approach while investing in any equity fund especially the small-cap funds. The returns over the five year period look better as the small-cap category had a range of about 11 per cent to about 25 per cent.

What constitutes small caps

A small cap fund is an open-ended equity scheme predominantly investing in small-cap stocks and the minimum allocation in the equity will have to be 65 per cent of total assets under the fund. In order to ensure uniformity in respect of the investment universe for equity schemes, after the re-categorization exercise, SEBI has defined a large cap, mid cap and small cap as follows:

a. Large Cap will be the 1st to 100th company in terms of full market capitalization

b. Mid Cap will be the 101st to 250th company in terms of full market capitalization

c. Small Cap will be the 251st company onwards in terms of full market capitalization

What to do

Investing in equity mutual funds require a horizon of at least seven years. For small caps, the volatility is expected to be more compared to large caps or mid caps. Small cap stocks are largely undiscovered companies and yet to fall in the league of bigger established blue chip ones. Exposure of bigger institutions including foreign financial institutions is lesser in them, compared to what large-cap and mid-cap stocks have and that s precisely why they have a low market capitalization.

Do not be overexposed in this category and small-cap funds should not form the core of your MF portfolio. One needs to be fully aware of the risks and the extent of capital loss in such funds over short to medium term, however, a better-managed fund may reap benefits of high-risk, high return over the long term