The Direct Plan shall have a lower expense ratio excluding distribution expenses, commission, etc., and no commission shall be paid from such plan.
The investment objective of the scheme is to provide investors with the opportunities for long-term capital appreciation by investing predominantly in Equity and Equity related instruments of Small Cap companies. However there can be no assurance that the investment objective under the Scheme will be realized.
IDBI Small Cap Fund (ISCF) is an open-ended equity oriented fund with a mandate to invest a dominant portion of its assets in small cap companies, some portion in other than small companies (including derivative instruments), and the rest in debt and money market instruments (including securitised debt) in it endeavour to achieve its investment objective.
Small Cap companies by definition of ISCF are those which constitute to be a part of the Nifty Smallcap 250 Index, or a company who capitalisation at the time of the investment is lower than or equal to the highest market cap stock in the Nifty Smallcap 250 Index.
Broadly, a small cap fund identifies stocks which have the potential of being multi-baggers. Identifying small cap stocks is not easy, since generally small cap companies have a host of problems viz. lack of capital, higher debt-equity ratio, lower interest coverage ratio, poor liaison, labour problems, etc. Small cap stocks enjoy high levels of demand when markets are booming, which leads to significant increase in their prices; but turn very volatile and can hit with huge losses during down swing of the market. Hence, for the fund manager of a small cap fund the task of identifying promising small caps is rather tricky. These are the companies which are not as established as their midcap and largecap counterparts. Nevertheless, they have a high growth potential and can be well-rewarding. But when the going gets tough, they may hit a patch of extreme volatility. Thus for investors, the risk associated with investing in small cap funds is very high.
ISCF is suitable only if you have a very high risk appetite and have a long-term investment horizon of 5-7 years in the journey of wealth creation.
| Instruments |
Indicative allocations
(% of total assets) |
Risk Profile |
| Minimum |
Maximum |
| 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 (including CBLO, Reverse Repo and units of liquid mutual fund schemes) |
0 |
35 |
Low to Medium |
Debt and money market instruments may include securitized debt up to 10% of the net assets of the Scheme.
The scheme may invest up to 50% of net assets of the scheme into equity derivatives instruments. Investment in derivatives shall be for hedging, portfolio balancing and such other purposes as maybe permitted from time to time.
The Scheme will not invest in ADRs/GDRs, foreign securities.
(*Source: Scheme Information Document)
What investment strategies will the fund follow?
In the endeavour to achieve the investment objective set out, ISCF will follow the below mentioned investment strategy…
For Equity Investments:
A predominant portion will be invested in equity and equity related instruments of small cap companies, and a small portion in equity and equity related instruments of other than small cap companies. The investment strategy would be geared towards constructing a well-diversified portfolio of companies from the small cap universe as per the definition of the scheme.
For its portfolio construction activity the fund will follow a combination of top-down and a bottom-up approach and the investment philosophy will focus on ‘growth at reasonable prices’ (GARP). Stocks will be analysed by the in-house equity research team for its merits and fundamentals — competitive position, earnings growth, management quality, promoter track record, future plans, valuation corporate governance, sustainable cash flows etc. – and will be monitored on an on-going basis. In addition to in-house research, external research such as newspapers, database, magazines etc. may be used as an additional source of information.
For Derivatives:
ISCF may use either Index based derivatives and/or their constituent based derivatives for the purpose of hedging and balancing.
Index Futures maybe used to hedge against market downturns (shorting the index) or position the Fund to benefit from a bullish outlook on the market by going long on these future contracts. ISCF from time to time may buy index futures to position the fund for a market uptrend. Likewise, to hedge the portfolio against market downward, ISCF will also sell index futures.
Index options will offer ISCF the opportunity to either capitalize on an expected market move or to protect holdings in the underlying instruments. The fund, to benefit from anticipated uptrend in broad markets, from time to time can buy call options. A long call option will give ISCF the option but not the obligation to buy the Index at the strike price. Stop loss is not defined and will be monitored by the investment team. Similarly, ISCF may buy index put options to hedge existing portfolios. The put option will give ISCF the flexibility to sell the portfolio at the strike price if the index falls below the strike price. The Fund will have to pay a premium to the option writer to buy this put option. There is no defined stop loss as the same will be monitored by the investment team.
ISCF may specifically use Stock futures as an alternative to investing in particular stocks that form a part of the index where either the liquidity is low or the impact cost is high in the cash market. ISCF can buy stock futures to realize a positive outlook on the stock or to rebalance sector positions. There will be no defined stop loss given the high volatility and the same will be monitored by the investment team.
To capitalize positive view on a stock or to rebalance sector positions, ISCF may buy call options on the stock against the payment of a premium. Buying a call option provides the option but not the obligation to buy the stock at the strike price. There will be no defined stop loss and the same shall be monitored by the investment team. Similarly, to implement a negative view on the stock or to hedge against downside in an existing stock holding or to rebalance sector positions, ISCF may purchase stock put options against payment of premium. This gives the option but not the obligation to ISCF to sell the stock if stock prices falls below the strike price.
For Debt Investments:
ISCF is mandated to invest upto 35% of its net assets into debt and money market securities, so that liquidity needs of the fund managed and from asset allocation standpoint. Debt instruments would include Collateralized Borrowing and Lending Obligations (CBLO), Reverse Repo, Certificate of Deposits (CDs), Commercial Papers (CPs), Treasury Bills (T-Bills), Non-Convertible Debentures (NCDs), bonds, floating rate debt instruments, and securities created and issued by the Central and State Governments.
The returns would be commensurate with the levels of risk taken in the portfolio and the portfolio would be structured to incorporate reasonable liquidity by the use of cash and cash equivalents.
Fund Manager Profile
ISCF will be managed by : Mr V. Balasubramanian.
Mr V. Balasubramanian ihas over 37 years of experience of which 19 years have been in the mutual fund Industry, and 8 years in Treasury of a nationalised bank. He holds a Master's degree in Commerce (M. Com) and CAIIB degree from the Indian Institute of Banking & Finance. Prior to joining IDBI Mutual Fund, he's worked as a Senior Manager of the Treasury branch of Indian Bank.
At IDBI he currently manages IDBI Equity Advantage Fund (previously known as IDBI Tax Saving Fund), IDBI Diversified Equity Fund, IDBI Prudence Fund (Equity portion) and IDBI Midcap Fund.
Fund Outlook
On evaluating the investment objective and strategy, it is evident that the fortune of ISCF will be closely linked to stocks in the small cap domain and how prudently the fund manager goes about constructing the portfolio amid times when valuations in the small cap domain has scaled to alarming heights — a trail P/E of 56.8 times on the S&P BSE Smallcap Index (as on June 1, 2017).
The demonetisation move of the Modi-led-NDA Government is already weighing on economic growth. In the last quarter of the fiscal year 2016-17 i.e. January to March 2017, India’s GDP growth rate at constant prices (with the 2011-12 as the new base year) has fallen to 6.1%, while the GVA (a refined parameter which excludes taxes and subsidy) to 5.6%, as manufacturing, construction and financial services weakened. For the entire fiscal year 2016-17, GDP has been pulled down to a 3-year low of 7.1%.
Gross Fixed Capital (GFC) formation, that highlights investment demand, too, has dwindled to 2.4% from 6.5% a year ago, while private final consumption has fared better, reporting a growth of 8.7% in 2016-17 as against 6.1% a year ago; although it is down from double-digit growth of 11% seen in the third quarter of fiscal year 2016-17.
But finance minister, Mr Arun Jaitely has dismissed claims that demonetisation was responsible for slackening economic growth rate. "It's global slowdown, not demonetization, that is responsible for slower GDP growth," he said as the Modi-led-NDA Government completes three years. He explicated that some slowdown was visible even before the note-ban. Fortunately, the Government spending after demonetisation has been an abetting factor for 1/3rd of the economic growth clocked by India in fiscal year 2016-17.
Going forward if the southwest monsoon turns out to ‘normal’ as forecasted by the Indian Meteorological Department, yes, it can add to economic growth. Besides, the GST regime would add 2.0-2.5% to economic growth. However, a number of small companies are yet to prepare to operate under the GST regime.
The core sector growth could scurry the Index of Industrial Production under the new series. Core sector growth (which comprises 8 industries: coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity) under the new base year of 2011-12 has tumbled to 2.5% in April from 5.0% in the month before, owing to contraction in output of coal, cement and a consecutive dip in electricity generation. Core sector growth has a weightage of 40.27% in IIP under the new series.
Nikkei India Manufacturing Purchasing Manager Index (PMI) has fallen to 51.6 in May 2017 from 52.5 in the month before on softer rise in new orders and production. But thankfully the data has stayed in the expansion zone for 5 consecutive months in May.
Nonetheless, as the impact of demonetisation fades, RBI turns accommodative in its monetary policy stance, and on smooth transition into the GST regime; the Indian economy is expected to do better. But the equity market would remain coupled with global factors viz. ‘Trumponomics’, process of ‘Brexit’, China’s economic slowdown, falling international crude oil prices, geopolitical tensions; which could alter the direction of the market over the short-term as FIIs react to newsflashes.
Such a scenario, poses a challenge for small companies.
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About the Company including business activity
Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.
QIS was promoted by Mr. Ajit Dayal with an objective of providing value-based information / views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.
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- Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report.
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