Reliance Small Cap Fund – An aggressive bet
Aug 31, 2010

Author: PersonalFN Content & Research Team

Reliance Small Cap Fund - An aggressive bet

Reliance Small Cap Fund (RSCF) is mandated as a predominant small cap fund, depicting an aggressive investment style, by betting on companies in the small cap segment.

Summary

Type	Open-ended equity scheme	Benchmark Index	BSE Small Cap Index
Min. Investment	Rs 5,000	Face Value	Rs 10 per unit
Entry Load	Nil	Exit Load *	2.0% / 1.0% / Nil
Issue Opens	August 26, 2010	Issue Closes	September 9, 2010

* 2% - If redeemed or switched out on or before completion of 12 months from the date of allotment of units
* 1% - If redeemed or switched out after 12 months but on or before completion of 24 months from the date of allotment of units
* Nil - If redeemed or switched out after the completion of 24 months from the date of allotment of units

Investment Objective*

The primary investment objective of the scheme is to generate long term capital appreciation by investing predominantly in equity and equity related instruments of small cap companies and the secondary objective is to generate consistent returns by investing in debt and money market securities.

*Source: Scheme Information Document

Is this fund for you?

Reliance Small Cap Fund (RSCF) is a small cap biased diversified equity fund from Reliance Mutual Fund, having linked to the BSE Small Cap Index as its benchmark. The fund follows an aggressive investment style by predominantly betting on companies in the small cap segment, thus trying to explore the potential of high growth and under valuations. The fund believes that the following advantages are available, whilst betting on small cap companies:

Potential of growth
Potential of being re-rated
Relatively undervalued, under researched and under owned when compared to large caps

Moreover, RSCF also bets on the instinct that today’s small caps have the ability of becoming multi-baggers on account of the entrepreneurial spirit which they follow, emerging opportunities and creation of global behemoths. RSCF will adopt a bottom-up approach while undertaking its stock picking activity, and will follow a blend (mix of value and growth) style of investing.

RSCF’s stock selection universe will consist of companies, whose market capitalization is between the highest and the lowest market capitalization of the BSE Small Cap Index. However, in order to meet the investment objective of RSCF, the fund manager may also have some flexibility in selecting stocks from other market cap segment to the extent of 35% of the portfolio.

Portfolio Strategy

RSCF will follow a blend style of investing (while selecting stocks in the small cap segment), by using bottom-up approach. The fund will maintain a diversified equity portfolio, by identifying stocks which reflect a cross-section of the growth areas of the economy. Moreover, while the primary focus of the portfolio, would be to “buy and hold”, the fund will not refrain from selling its holding when valuations look over-stretched, despite the face of reasonable growth prospects in the long-term for such companies. Hence, in such a situation RSCF may see a high portfolio churning resulting in high portfolio turnover.

The fund is mandated to allocate its assets as under:

Instruments	Allocation Range (% to Total Assets)		Risk Profile High/Medium/Low
Instruments	Minimum	Maximum	Risk Profile High/Medium/Low
Equity and equity related securities of small cap companies including derivatives#	65	100	High
Equities and equity related securities of other companies including derivatives#	0	35	High
Debt and money market securities (including securitised debt upto 30% of corpus)	0	35	Low to Medium

# The Scheme proposes to invest at least 65% of the corpus in Equity & equity related instruments of small cap companies which may go upto 100% of the corpus. The investment in Equity & equity related instruments of any other companies other than small cap companies will be in the range of 0-35% of the corpus.

While doing stock picking RSCF will identify stocks (in the small cap space) whose market capitalisation is between the highest and the lowest market capitalization of the BSE Small Cap Index.

Fund Manager Profile

Mr. Sunil Singhania is the Head of Equity and a senior fund manager at Reliance Mutual Fund. He holds a B.Com, FCA and a CFA degree and has vast experience of 16 years in capital markets and equity research. His last assignment was as a Director - Institutional Sales & Research, Equity Derivatives with Advani Share brokers Pvt. Ltd. Prior to that he was associated with Motisons Securites Pvt. Ltd as a President and was instrumental in setting up the broking business, NSE trading membership and developing the systems.

Outlook

RSCF is positioned as a diversified equity fund focusing towards small cap stocks. The fund gives investors’ the opportunity to participate in the growth story of today's small caps, which have the potential of being tomorrow’s multi-baggers. However, the success of the fund will largely depend upon the skills of the fund manager and his research team, in identifying such companies for investments. In our opinion, the investment systems and processes will play a very vital role, while following the bottom-up approach of quality stock-picking from the small cap universe.

In case of bull markets, the fund manager may also be tempted to churn the portfolio of the fund, quite often, which would result in a higher portfolio turnover ratio for the fund. This in a way would lead to the fund manager, forgoing the reasonable growth prospects of small caps in the long-term.

PersonalFN provides research recommendations to its premium research subscribers and financial planning clients. To know the recommendation on this investment, become a subscriber or client today. Click here to know about our research services. or Click here to know about our financial planning services. Or, simply write to info@personalfn.com. You can also call us at +91 22 6136 1200.