Canara Robeco Small Cap Fund: A Worthy Proposition?
Jan 29, 2019

Author: Aditi Murkute

(Image source: unsplash.com)

As several fund houses are seeking opportunity to invest in the beaten down small cap space, Canara Robeco Mutual fund, too, has come up with an open-ended equity scheme, Canara Robeco Small Cap Fund (CRSCF).

CRSCF  will predominantly invest (65% of its net assets)  in small-cap companies, which hold the potential of being tomorrow’s mid and large caps.  As per the capital market regulator, SEBI, small-cap companies are defined as those that fall beyond the 250th stock in terms of full market capitalization. In addition, CRSCF may also invest up to 35% of its total asset in equity and equity-related instruments of companies other than small caps.

A noteworthy trait about small-cap companies is, usually due to their low trading volume, the investment risk associated with them is higher than with larger firms. Plus, there is inherent risk involved due to their limited scale of operations, product lines, narrow distribution channels and limited financial and managerial resources, and greater sensitivity to changing economic conditions.

Small-cap securities also include newer or recently restructured companies or those which may have experienced financial difficulties, and which may or may not be listed.

Hence, small-cap funds have the tendency to go from thrilling highs to dangerous lows. Although the recent correction in the small-cap space offers a decent margin of safety, the very-high risk of investing in the small-cap space cannot be ruled out.

So, only if you are ready to assume high volatility, have the appetite for very-high risk, and an investment time horizon of over 10 years, consider investing some portion in a small-cap fund/s in the endeavour of wealth creation.

[Read: Should You Invest In Small-Cap Funds In 2019?]

Table 1: NFO details

Type
An open-ended equity scheme
 
Category Small-cap Funds
Investment Objective
To generate capital appreciation by investing predominantly in Small Cap stocks. However, there can be no assurance that the investment objective 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# and Pay out)

*Default option

# Default option for Dividend
 
Entry Load Nil Exit Load In respect of each purchase / switch-in of units:
  • 1% - if Units are redeemed / switched-out within 1 year from the date of allotment.
     
  • Nil – if redeemed/switched out after 1 year from the date of allotment
Fund Manager
Mr Krishna Sanghavi and Ms Cheenu Gupta
 
Benchmark Index Nifty Smallcap 250 Index
Issue Opens
January 25, 2019
 
Issue Closes: February 08, 2019
(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: CRSCF’s Asset Allocation

Instruments Indicative Allocation (% of Net Assets) Risk Profile
Equity and Equity-related Instruments of Small cap companies* 65 100 High
Equity and Equity-related Instruments of companies other than Small cap companies 0 35 High
Debt and Money Market Instruments 0 35 Low to Medium
Units issued by REITs and InvITs 0 10 Medium to High
*Investment universe of "Small Cap":
  • The investment universe of "Small Cap" shall comprise companies as defined by SEBI from time to time.
  • In terms of SEBI circular SEBI/ HO/ IMD/ DF3/ CIR/ P/ 2017/ 114 dated October 6, 2017, the universe of "Small Cap" shall consist of 251st company onwards in terms of full market capitalization and that the Scheme will be required to adhere the following:
    • The list of stocks of Small Cap companies prepared by AMFI in this regard will be adopted.
    • The said list would be uploaded on the AMFI website and would be updated every six months based on the data as on the end of June and December of each year or periodically as specified by SEBI.
    • Subsequent to any updation in the said list as uploaded by AMFI, the portfolio of the Scheme will be rebalanced, if necessary, within a period of one month.

Investment in Derivatives can be up to 40% of the Net Assets of the Scheme.

The Scheme may invest in Foreign Securities up to 20% of the net assets of the Scheme. However, investment in ADRs/GDRs would be included under the overall investment limits set for foreign securities. Investment by the Scheme in ADRs/GDRs shall not exceed 20% of the net assets of the Scheme.

The stock lending done by the Scheme (if any) shall not exceed 25% of the net assets of the Scheme.

Exposure by the Scheme in Securitised Debt shall not exceed 30% of the Net Assets of Scheme.

(Source: Scheme Information Document)


What will be the Investment Strategy?
 

The fund seeks to generate capital appreciation by investing predominantly in Small Cap stocks. The fund might also have exposure to other equity & equity related instruments along with debt securities & money market instruments.

Equities have the potential to generate higher returns than most other asset classes over a longer period. In equities, small-cap companies are potential mid/large caps of tomorrow. These companies offer diversification as well as high growth potential investment opportunity as compared to large-cap and mid-cap companies due to the ability to gain market share and a smaller base of operation with the potential to expand over a period.

Small cap funds tend to generate alpha by focusing on:

✔  Quality of business and management;

✔  Consistency in earnings growth; and

✔  Valuations.

Small cap companies, for the purpose of the fund, are defined as stocks which are ranked above 250 companies in terms of market capitalization based on the SEBI circular of recategorization

The Fund Manager of the Scheme is responsible for making buy/sell decisions for the Scheme's portfolio and seeks to develop a well-diversified portfolio considering the asset allocation patterns of other schemes along with risks that are associated with such investments. The investment decisions will be made on an ongoing basis keeping in view the market conditions and other regulatory aspects. The investment team of the AMC will carry out a rigorous in-depth analysis of the securities proposed to be invested in.

The fund manager would incorporate adequate safeguards for controlling risks in the portfolio construction process. The risk control process involves reducing risks through portfolio diversification, taking care however not to dilute returns in the process.


Who will manage Canara Robeco Small Cap Fund?
 

CRSCF will be co-managed by Mr Krishna Sanghavi and Ms Cheenu Gupta

Mr Krishna Sanghavi holds a bachelor’s degree in commerce (B.Com), is a cost accountant (ICWA) and has to his credit an MMS in Finance. He has 23 years of work experience in the financial services, and currently is the key personnel, Head-Equity, at Canara Robeco Mutual Fund.

Some of the other schemes he manages are Canara Robeco Infrastructure, Canara Robeco Equity Diversified Fund, Canara Robeco Blue Chip Equity Fund, Canara Robeco Emerging Equities, Canara Robeco Consumer Trends Fund, Canara Robeco Equity Tax Saver Fund and Canara Robeco Equity Hybrid Fund.

Ms Cheenu Gupta is a CFA Charter holder (USA), plus has to her credit a PGDBM (Finance) and B.E. (I.T) and has a work experience of 12 years. 

Currently, at the fund house, she co-manages Canara Robeco Equity Tax Saver Fund and Canara Robeco Consumer Trends Fund with Mr Krishna Sanghavi.


The outlook for Robeco Small Cap Fund:
 

Given the investment mandate, the fortune of CRSCF will be closely linked to the performance of the small-cap companies held in the portfolio. The Nifty Smallcap 250 Index in the last 1 year is down -31.24%, while over a 3-year period it is up +7.70% CAGR. The corrected valuations in the small-cap space will provide the fund manager opportunity to do value picking. During market rallies, small-caps usually tend to outperform large-caps.

The value of the Scheme investments may be affected by factors, such as price and volume volatility in the stock markets (particularly small-cap domain), interest rates, currency exchange rates, foreign investments, changes in government policy, political, economic or other developments and closure of the stock exchanges.

This year, 2019, would be challenging for Indian equities. Some of the key influencers for Indian equities include GDP growth (which seems to have lost momentum of late), India Inc.’s earnings growth, how international crude oil prices move, the inflation trajectory,  interim budget 2019 announcements, the outcome of Lok Sabha elections, impact of farm loan waiver and increased MSP (Minimum Support Price) on fiscal deficit, and the global macroeconomic and geopolitical backdrop. It will not be an easy year for wealth creation and volatility will be obvious. Hence, constructing the portfolio would be a challenging task for the fund manager, and if the Indian equity markets hit more turbulent waters ahead it may inflict high-risk.

PersonalFN is of the view that, understanding the overall implications of investing in a small-cap fund is important. Note that small-cap funds are placed at the higher end of the risk-return spectrum.


Hence invest in small-cap funds only if you:
 

  • Have a very high-risk appetite

  • Can stay invested for 7-10 years without getting perturbed

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