BOI AXA Small-cap Fund is the new offering from BOI AXA Mutual Fund. It is an open-ended equity scheme mandated to invest in companies that fall under the small-cap category. As per SEBI’s definition, 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.

While small-cap companies do have the potential of a multi-bagger, they exhibit a pattern to move from steep high to dangerously low. Thus, the risk associated with a small-cap fund is probably bigger than any other category of funds. BASCF, is extremely a high-risk high-return investment proposition, suitable only for investors having very high-risk appetite and longer investment time horizon.

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

Table1: NFO Details of BASCF

Type	An open-ended equity scheme predominantly investing in small-cap stocks	Category	Small Cap Fund
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 that the investment objectives of the Scheme will be realized.
Min Investment	Rs 5,000 and in multiples of Re 1 thereafter	Face Value	Rs 10 per unit
Plans	• Direct • Regular	Options	•Growth •Dividend (Reinvestment & Payout)
Entry Load	Not Applicable	Exit Load	It is 1% if redeemed within 1 year from the date of allotment.
Fund Manager	Mr Saurabh Kataria and Mr Ajay Khandelwal	Benchmark Index	Nifty Small-cap 100 Total Return Index
Issue Opens	November 28, 2018	Issue Closes:	December 12, 2018

(Source: Scheme Information Document)

How will BOI AXA Small Cap Fund allocate its assets?

Under normal circumstances, the scheme will allocate its assets as follows:

Therefore, within the prescribed limit the BOI AXA Small-cap Fund will allocate its assets predominately in equity and equity related instruments of small-cap stocks. The scheme may even invest up to 35% of its assets in equity and equity related instruments of companies other than small-cap companies. For the risk-management purpose, the fund may also choose to allocate some portion of its assets into debt and money market instruments and units of REITs and InvITs.

[ Read: Why You Should Not Ignore Personalized Asset Allocation While Investing]

What will be the Investment Strategy?

To achieve its objective of generating long-term capital appreciation by investing predominantly in equity and equity-related securities of small cap companies, BASCF would follow an active fund management approach allowing it the flexibility to pursue opportunities having an unbiased approach of sectoral allocations. The investment environment, valuation parameters and other investment criteria will be the factors to determine the above-mentioned asset allocation and investment style

Equity Investment Strategy:

As per the scheme information document, under normal market conditions, the Fund Managers would invest the scheme’s assets across stocks that represent a broad range of sectors of the economy, in order to ensure adequate portfolio diversification.

The fund managers would follow a top-down approach to shortlist stocks for portfolio construction in line with the process outlined below. Under this process, the Fund Manager would look at the global and Indian economy, the domestic policy environment and stock valuations. This would help in identification of themes which have a potential to outperform.

For the final stock selection process, the fund manager would follow a bottoms-up process wherein stocks from the short-listed themes would be picked up based on valuations.

For asset allocation, the Fund Manager would take the help of qualitative framework of MVPS (Macro, Valuation, Policy and Sentiment). Sentiment would be evaluated from factors like the positive/negative breadth of the market, inflows/outflows into equity mutual funds and FII buying/selling figures.

Diagram 1: 5-step Investment Process Explained

(Source: Scheme Information Document)  

Who will manage BOI AXA Small Cap Fund?

BASCF will be managed by Mr Saurabh Kataria and Mr Ajay Khandelwal

Mr Saurabh Kataria is a fund manager – equity at BOI AXA Investment Managers Pvt. Ltd. He joined BOI AXA Investment Managers in August 2009 and has over 12 years of experience in equity markets. Mr Kataria has an Honorary Bachelor’s degree in Commerce with an MBA in finance to his credit. He has also been associated with organizations like Irevna Research Services Pvt. Ltd, Goldman Sachs India Private Ltd and Askar Capital Private Equity before joining BOI AXA Mutual Fund.

Some of the funds that he handles as the lead fund manager include BOI AXA Tax Advantage Fund, BOI AXA Capital Protection Oriented Fund Series 5, BOI AXA Mid Cap Tax Fund- Series 1  and BOI AXA Mid Cap Tax Fund- Series 2

Mr Ajay Khandelwal will be the lead co-fund manager overlooking the scheme’s investments. He holds a BE degree followed by MBA with a decade of experience in Equity Research. Prior to joining BOI AXA Mutual Fund, he worked with B&K Securities and Infosys.  

At the fund house, he co-manages BOI AXA Small & Mid Cap Equity & Debt Fund and BOI AXA Arbitrage

The Outlook for BOI AXA Small Cap Fund:

The launch of BOI AXA small-cap fund coincides with the drastic fall in the mid and small cap segment. Amidst the market corrections, the fund managers see this as a vantage point to invest in small cap stocks.

The product note released by the fund house mentions following reasons behind investing in small caps:

• Exhibit higher returns as they remain out of the spotlight until they attain a noteworthy size in terms of revenues and profits.

• Inefficiencies in price discovery mean the potential for higher returns. Typically, lesser number of analysts track these companies, and the institutional ownership is lower vis-a-vis large caps.

While creating a portfolio of small cap stocks, the fund managers will follow qualitative and quantitative research of the 5-step investment process right from stock screening, to industry analysis, asset allocation, portfolio construction and risk management. Although the process looks robust, the fund house does not have a dedicated mid cap-oriented fund in its basket of open-ended funds, which could help judge its expertise in the mid and small cap space. Its mid and small cap oriented Aggressive hybrid fund is an underperformer and still to complete 3 years; while both its mid cap oriented close-ended tax saving funds are less than a year old to form any view.

Small caps are not everyone’s cup of tea. Only if you are willing to bear the high risk associated with small caps and have an investment time horizon of more than 5 years, should you consider investing in small cap funds. However, before that make sure you have fair exposure to Large and mid-caps.

To read PersonalFN’s view click here.

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