At a time when the small cap stocks have been beaten down considerably, Edelweiss mutual fund has launched an open ended scheme predominantly investing in small-cap stocks. After all, as the adage goes, ‘buy low-sell high’ should be the aim of any investor. The Edelweiss Small Cap fund will be available for purchase from Jan 18, 2019 till February 1, 2019 during the New Fund Offer (NFO) period.

What is unique about the scheme and perhaps in line with the investor’s need is that the investor’s money will not be invested entirely in the market in one-go. Rather, the funds will be invested in a staggered manner to mitigate the market timing risk, through the process of ‘SteP – Smart Trigger enabled Plan’.

Even though market experts suggest not to try timing the market and instead focus on ‘time in the market’, in an election year, such a feature especially in the small-cap space, may help investors take a cautious approach for investing. Being a small cap fund which inherently needs a long time to show its true colour, the SteP feature is expected to soothe the nerves of many investors.

How SteP facility works

Under SteP facility, investors can spread their investment in Edelweiss Small Cap Fund in 5 equal monthly instalments. Under this facility, 20 percent of the application money will be invested upfront in Edelweiss Small Cap Fund. The remaining 80 percent will be invested in Edelweiss Liquid Fund and will switch to Edelweiss Small Cap Fund in 4 equal monthly instalments.

Where will your money be invested

The fund is to be managed by Harshad Patwardhan and it has the mandate to invest 65 percent to 100 percent into equity and equity related securities of small-cap companies and upto 35 percent into equity and equity related securities of other companies and debt and money instruments.

Fund’s benchmark

Knowing the fund’s benchmark helps in understanding the universe of sectors and stocks that the fund manager will primarily want to stick to. The composition will go a along way in determining the returns of the fund. The benchmark of the fund is the Nifty Small Cap 250 TR Index, nearly 50 percent of which represents companies in Financial services, Consumer goods, Industrial manufacturing and Construction. As on 31 December, 2019, the annualised Total Return of the Benchmark (including dividends) is negative 26 percent over 1-year, while it is about 18 percent over the 5-year period. The following are the top constituents by weightage of the benchmark index.

Karur Vysya Bank: 1.66 percent

IDFC : 1.39 percent

Atul Ltd.: 1.34 percent

Ipca Laboratories : 1.31 percent

Cyient Ltd.: 1.29 percent

Fortis Healthcare : 1.20 percent

PVR : 1.20 percent

NIIT Technologies : 1.17 percent

Schaeffler India : 1.11 percent

Delta Corp : 1.10 percent

Why small cap funds

Equities as an asset class boast of having the potential to generate a high inflation adjusted return over the long term. A lot of it depends on the selection of the right stock or a portfolio comprising of future winners.

To a large extent, the winners of tomorrow are not the today’s front-runners. However, identifying them is all it takes to spot the small cap company that may emerge a blue chip in the time to come. Small-caps are relatively under-researched . As per the fund house, Out of 870 stocks in BSE Small-cap Index, 210 stocks are not covered by any analyst, while 398 stocks are covered by less than 5 analysts. This gives fund manager an edge in spotting good businesses early and generate higher alpha.

What to do

Investors should note that small cap mutual funds fall in the high risk category as defined by the market regulator Sebi and therefore one should be cautious in its selection. Exposure to small-cap fund should not be high in one’s overall MF portfolio. They should not form the core of your MF portfolio to meet your long term goals but may very well act as a kicker to portfolio returns over long term.