A close-ended equity fund aims to provide capital appreciation by primarily investing in equity and equity related instruments of small cap companies.

Scheme details of L&T Emerging Opportunities Fund

Investment Objective of L& T Emerging Opportunities Fund*

The investment objective of the scheme is to provide capital appreciation by primarily investing in equity and equity related instruments of small cap companies.

There can be no assurance that the investment objectives of the scheme will be realized and the scheme does not assure or guarantee any returns.

*Source: Scheme Information Document

Is L& T Emerging Opportunities Fund for you?

L& T Emerging Opportunities Fund Series 1 (LTEOF) is a close-ended equity oriented fund with a tenure of 1151 day. The objective is to create long term capital appreciation by primarily investing in equity and equity related instruments of small cap companies.

Being an equity oriented mutual fund scheme, it will invest at least 65% of its portfolio in stocks of small cap companies which are defined as stocks beyond top 250 in terms of market capitalisation as per the National Stock Exchange (NSE) or the Bombay Stock Exchange.

Also, LTEOF may also invest in derivative instruments for the purpose of hedging, portfolio balancing and return optimisation.

Please note, small cap stocks have a potential to generate super-normal returns. Smaller companies tend to grow faster than mid and large sized companies. But since they are placed at the lower end of market capitalisation, they are prone to low volume and less liquidity. Thus, given this trait, LTEOF is likely to command very high risk.

Therefore before investing your hard earned money, it is imperative to take into account your risk appetite and risk tolerance. Also amid times where the Indian equity market recently clocked an all-time high, portfolio construction could be challenging task, especially in the small and mid-cap domain where they have run-up rather far in comparison to large caps. This therefore has reduced the margin of safety in the small and mid-cap domain at present.    

Hence, the fund is suitable for investors with a high-risk appetite and willingness to block their money for a period of 1151 day. This fund is best suited for investors who can assume high risk in an anticipation of high returns in future. Also keep your liquidity needs in mind before investing into a close-ended fund.

How will L& T Emerging Opportunities Fund allocate its assets?

* Includes investment in derivatives up to 50% of the net assets of the Scheme.
^ The Scheme may invest in securitized debt upto 20% of its net assets

Further it is stated in the offer document that:

• The Scheme does not propose to engage in short selling, securities lending and repo in corporate bonds
• The Scheme may invest in equity derivatives instruments to the extent permitted under and in accordance with the applicable Regulations, including for the purposes of hedging, portfolio balancing and optimizing returns

(*Source: Scheme Information Document)

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What investment strategy will L& T Emerging Opportunities Fund – follow?

Being a close-ended equity fund, it predominantly invests into equity and equity related securities, including equity derivatives. With upto exposure to debt securities limited upto 20% of its net assets.

Investment strategy for equity allocation:

The Scheme mandate states that the fund will primarily be a diversified equity fund which will invest at least 65% of the portfolio in small cap stocks. This is with an aim to generate long term capital appreciation.

Small cap stocks are equity and equity related instruments of companies that are beyond top 250 companies based on the market capitalization. Market capitalisation is the value of a company at which it is traded on the stock market. It is calculated by multiplying the total number of shares by the present share price.

Further, the fund manager will adopt bottom-up approach in stock selection. It will select companies that offer the best value relative to their respective long-term growth prospects, returns on capital and management quality. When assessing a company, the fund managers will focus on understanding how each of these factors will change over time.

Investment strategy for debt allocation:

Investments in securitised debt will be done based on the assessment of the originator and the securitised debt which is carried out by the credit research function based on the in-house research capabilities as well as the inputs from the independent credit rating agencies.

The dedicated credit research team which supports the Fund Manager will generally adopt a bottom-up approach while assessing the debt issuer and will consider various factors for the purpose of identification of the securitised debt.
 

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Fund Manager Profile

The fund will be managed by Mr Vihang Naik is fund manager - L& T Asset Management Co. Ltd. He is a Bachelor in Management Studies and a CFA. He has around 10 years of experience in the Finance Industry. Prior to joining L& T AMC he was associated with MF Global Sify Securities, Motilal Oswal Securities and SBICAP Securities as a Research Analyst.

Other Schemes managed by Mr Vihang Naik are L&T Midcap Fund, L&T Tax Saver Fund, and L&T Long Term Advantage Fund – I

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Fund Outlook

On evaluating the fund’s objective and investment strategy, LTEOF will have upto 100% exposure to equity and equity related instruments of small cap companies.

With this dominant portion of the fund’s asset being invested in small cap companies, the fortune of the fund will be linked with the stocks in the small domain. With small-caps having run-up ahead of large caps, margin of safety for portfolio construction seems reduced along with stretched valuations. Small caps can be more vulnerable in case of events panning out other than what the markets expect. Thus, given this, LTEOF is likely to command very high risk. And being a close-ended fund, you would not have a choice but to hold onto it until maturity.

Further., to support budget expenditure, the government finally decided to levy 10% tax on long term capital gains in the Budget 2018-19. Quite predictably, markets sold off in the subsequent trading session following the Budget.

The prevailing high valuations had already made the market unstable, Budget 2018 was the tipping point.

In terms of valuations, the price-to-earnings (P/E) multiple of the S&P BSE Sensex eased to under 25 times. The P/E of the S&P BSE MidCap is stilling hovering near 40x and that of the S&P BSE SmallCap index remains above 100 times.

All the indices are trading over twice their long-term average P/E. Hence, chances of a further decline cannot be ruled out. So, long-term capital appreciation and growth would depend on how well the fund manager plays the opportunities and challenges in coming time.

Hence, L& T Emerging Opportunities Fund Series -1 is expected to carry high risk while achieving its investment objective.

As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor.

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palchinmay@gmail.com Feb 15, 2018 Let me know more about it.

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