NFO – Principal Small Cap Fund

Small cap stocks have performed poorly in the last one and half year. They have lost more than one-third of their value in the past one and half year period. In the same duration, the large-cap stocks have done considerably well. Hence, the outperformance of large-cap stocks and underperformance of small-cap has created a good opportunity in the small-cap space. Principal Mutual fund has launched the Principal Small Cap Fund.

Objective: It is an open-ended equity diversified fund that would majorly invest in equities and equity-related securities of companies which are beyond top 250 stocks by market cap. These are the companies that are defined as small-cap companies, according to a SEBI circular issued in the year 2017.

Strategy: There are around 4,750 small-cap stocks listed in India. The fund will apply different filters to arrive at right kind of universe to select stocks. Some of the filters are.

· It should have a daily trade value of more than Rs. 1 crore

· The management quality should be of a high standard

· Company should have a good track record and a better growth outlook

This process will bring down the universe of stocks to invest in only 200. After this initial filter, the fund will apply a bottom-up strategy to select those stocks that are growing and are available at a reasonable price. Maximum part of the fund needs to be invested in small-cap stocks, however, some part may be invested in large-cap and mid-cap space to provide stability.

STEP and AUTO TRIGGER:

The fund has come out with two unique facilities.

Smart Trigger Enabled Plan (STEP): This facility helps you to stagger your investments and this is available exclusively during NFO period. STEP aims to protect against a sharp fall in the market as it invests in a staggered manner to mitigate market-timing risk. If you want to avail this facility you need to invest minimum of Rs. 25,000.

Through STEP facility, investors can stagger their investment in the Principal Small Cap Fund in four equal monthly instalments and only 25 per cent of the application money is invested upfront in the Fund, remaining 75 per cent is invested in Principal Cash Management Fund. If the market falls 3 per cent from the date of allotment, the STEP gets activated and it automatically shifts 25 per cent of the initial investment to Principal Small Cap Fund. If there are no fluctuations in the market, the switch takes place at the following month end from Principal Cash Management Fund to Principal Small Cap Fund.

The Auto Trigger facility allows an investor to set a target rate of return after the appreciated amount will automatically shifts to another fund when the target rate is achieved. Investors could use this facility to automatically rebalance their exposure to small-cap stocks.

Fund Manager: The Scheme will be managed by PVK Mohan, Fund Manager and Siddarth Mohta, Associate Fund Manager. PVK Mohan manages nine funds, with average asset under management (AUM) comes at Rs 376 crore and average returns generated by these funds in last one year is around 3 per cent.

Our research has shown that investing in NFOs are not best of the investing tool, especially, if they are not offering anything new or something that is topical.