UTI Small cap Fund: Aiming to spot future leaders

Dec 11, 2020

Listen to UTI Small cap Fund: Aiming to spot future leaders

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Amid the COVID-19 pandemic, small-sized businesses were among the worst affected sectors; the government has set forth various initiatives to nurture small businesses back to life. Therefore, in the long run, small companies are expected to expand.

Consequently, investor sentiment has improved in recent months, striking the indices upward, and the small-cap index has now made a strong comeback after the March crash.

The performance of any equity-oriented mutual fund, especially in the small-cap fund category, depends primarily on stock selection.

Looking at the current scenario, UTI Mutual Fund is of the view that small businesses have a wider scope to grow. The fund house believes that small businesses are the backbone of the Indian economy due to their presence across sectors engaged primarily in manufacturing, pharma, services, construction, etc. In addition, small-caps offer an exciting space to spot potential future blue chips at an early stage and benefit from its growth over the long run.

Consequently, they have launched UTI Small Cap Fund, an open-ended equity scheme predominantly investing in equity and equity-related securities of small cap companies with a focus on long-term capital appreciation. UTI Small Cap Fund's performance will be benchmarked against Nifty Small Cap 250 TRI.

Being a small-cap fund, UTI Small Cap Fund is mandated as per SEBI to invest at least 65% of its assets in small cap companies. Small-cap companies are those that fall in the list that starts from 251st onwards in terms of full market capitalization as per SEBI classification.

The objective of the scheme is to generate long-term capital appreciation by investing predominantly in equity and equity related securities of small cap companies. However, there is no assurance or guarantee that the investment objective of the scheme will be achieved.

Table 1: Details of UTI Small Cap Fund

Type An open-ended equity scheme predominantly investing in small-cap stocks Category Small-cap Funds
Investment Objective To generate long-term capital appreciation by investing predominantly in equity and equity-related securities of small-cap companies.
However, there can be no assurance or guarantee that the investment objective of the scheme would be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1/- thereafter with no upper limit
Additional Purchase Rs 1000/- and in multiples of Re 1/- there after
Face Value Rs 10/- per unit
Plans
  • Direct
  • Regular
Options
  • Growth
  • Dividend
Entry Load Not Applicable Exit Load
  • An Exit Load of 1% is payable if Units are redeemed / switched-out within one year from the date of allotment;
  • Nil if Units are redeemed / switched-out after one year from the date of allotment
Fund Manager
  • - Mr Ankit Agarwal
  • - Mr Kamal Gada
Benchmark Index Nifty Small cap 250 TRI
Issue Opens: December 2, 2020 Issue Closes December 16, 2020
(Source: Scheme Information Document)


​What will be the Investment Strategy?

UTI Small Cap Fund an open-ended equity scheme will invest predominantly in equity and equity related securities of small cap and select mid cap companies with a focus on long-term capital appreciation. The Scheme will use a blend of growth and value style investing with a tilt towards growth.

The scheme will primarily rely on the bottom-up stock selection process; however, it will use the top-down approach from a risk management perspective. To select stocks for the investment universe, the fund will consider factors such as business fundamentals, financial strength, sustainable cash flows, earnings growth potential, attractiveness of valuation, scalability of business, management quality, etc.

The fund will deploy its 360-Degree Risk Assessment Framework called ‘Scoreα’ that entails the following:

  • In-depth research methodology to consistently identify good stocks and avoid poor ones.

  • Maintaining judicious portfolio diversification across stocks and sectors

  • Position sizing, based on the relative conviction, market depth and overall stock level risks

  • Continuous evaluation and monitoring of risk parameters and companies in the portfolio

This Scheme will focus towards creating wealth and mitigating risk by investing in companies with scalable business models, undergoing a turnaround or transformational change creating possibility of mean reversion in valuations.

The fund manager will aim to invest about 65-80% of its assets in small companies along with significant allocation of 20-35% in select mid-caps. It can also hold up to 35% of its assets in Debt & Money Market Instruments including securitized debt, and has flexibility to invest up to 10% of its assets in Units issued by REITs and InvITs.

Under normal circumstance the fund's asset allocation pattern will be as under:

Table 2: Asset Allocation of UTI Small Cap Fund

Instruments Indicative Allocation
(% of Net Assets)
Risk Profile
Minimum Maximum High/Medium/Low
Equity and Equity related instruments of small-cap companies 65 100 Medium to High
Debt and Money Market Instruments including securitized debt* 0 35 Low to Medium
Units issued by REITs and InvITs 0 10 Medium to High
*The fund may invest up to 50% of its debt portfolio in securitized debt.
(Source: Scheme Information Document)


Who will manage UTI Small Cap Fund?

UTI Small Cap Fund will be managed by Mr Ankit Agarwal and Mr Kamal Gada shall be the dedicated fund manager for managing overseas investments.

Mr Ankit Agarwal joined UTI in August 2019 as Fund Manager - Equity with Department of Fund Management. He graduated in B.Tech from National Institute Technology (NIT), Trichy and he holds a PGDM (General Management) from Indian Institute of Management (IIM), Bangalore. He has more than 13 years of experience. Mr Ankit has more than 13 years of industry experience across the market cycles.

Prior to joining UTI, he was with Centrum Broking Ltd. in the capacity of Senior Vice President managing both on-shore and off-shore equity asset management platforms. He was also associated with Barclays Wealth leading part of equity research team. In addition, he had brief stint at DE Shaw India, a US based hedge fund and Lehman Brothers, London on their institutional desk.

Currently, he manages UTI Mid Cap Fund (managing since Aug-2019) with an asset size of over 4000 crores.

Mr Kamal Gada is Senior Associate Vice President at UTI Mutual Fund. He is a CFA Charter holder from CFA Institute. He has completed CA from ICAI. He graduated in Bachelor of Commerce in 2003 from Mumbai University.

He began his career with BPCL as Senior Accounts Officer in 2004. Kamal joined UTI AMC in 2008 as Research Analyst. He has over 12 years of experience in Equity Research. Presently, he has been designated as Fund Manager for Overseas Investments.

Fund Outlook- UTI Small Cap Fund

Investors have seen mounting uncertainty in 2020 amid the COVID-19 Pandemic, now the economy is in a much better place and liquidity flows in the market have been strong. The recent market correction has provided small cap stocks the opportunity to warm up.

Small caps have a high return potential though there are various risks associated with them. These companies have smaller operations with limited access to various resources. At times, if resources are constrained, they may face survival risk in case of economic downturn.

Further, there is a liquidity risk associated with them as the limited number of shares makes it difficult for investors to buy and sell as per their wish. That said, a strong business helmed by a well-built management team along with the availability of stock at a reasonable price could make it a very attractive investment.

Thus, the performance of UTI Small cap Fund would depend on the fund manager's ability to pick quality stocks at reasonable valuations.

Small-cap funds are high-risk high-return investment proposition. Investors seeking higher returns potential over a long-term horizon of at least 5-7 years and willing to ride the underlying higher portfolio volatility and risks may consider investing in UTI Small Cap Fund.

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Warm Regards,
Divya Grover
Research Analyst

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