New mutual fund scheme: TRUST Mutual Fund has introduced its newest equity offering, the TRUSTMF Small Cap Fund. This open-ended equity scheme is specifically designed to target small-cap stocks, aiming to provide investors with exposure to high-growth sectors and emerging themes. By leveraging the potential of small-cap companies, this new fund offers a unique opportunity for investors seeking to diversify their portfolios. The scheme will be benchmarked against the NIFTY Smallcap 250 TRI index.
Since 2020, the small-cap Segment with a market capitalisation greater than Rs 2000 crore has expanded by almost four times, presenting a diverse selection of investment prospects within promising sectors. The TRUSTMF Small Cap Fund is designed to capitalise on these prospects by adhering to a disciplined investment approach focused on fostering sustainable wealth growth for its shareholders.
Mihir Vora, Chief Investment Officer at TRUST MF, said: “The small-cap segment is a unique space for investors to discover high-growth companies early in their journey. Our strong research foundation at TRUST MF allows us to identify these promising stocks. Our investment philosophy of Terminal value investing focuses not only on good growth in the near future but attributes even more importance to the length of the growth runway. This allows us to put an appropriate valuation to the long-term growth potential and ensures that we remain committed to businesses throughout their entire value creation journey. In the small-cap space, this approach is crucial, as these companies often have a long, underappreciated runway for growth.”
Sandeep Bagla, CEO of TRUST Mutual Fund, spoke to Business Today on its latest offering. Edited excerpts:
1. What makes this scheme stand out in the current market situation?
There have been numerous sectoral and thematic NFOs in the recent past that have found favour with investors and distributors. Most of these sectoral/thematic funds will invest predominantly in companies, which are classified as small or mid-caps. However, the investment will be restricted to a specific sector or theme.
TRUSTMF Small Cap Fund is an unrestricted diversified fund that will invest in tomorrow’s emerging leaders across multiple sectors and themes. As per consensus earnings estimates, the earnings for small cap index are expected to grow at 18% for the next 2 years, as compared to 8% in the case of the large cap index. TRUSTMF Small Cap Fund provides an opportunity to participate in high-growth sectors and emerging companies of the future.
2. Small cap schemes invest in very small companies or their stocks. Why investors should choose small cap funds, like TRUST MF Small Cap Fund.
It is a misnomer that small-cap funds invest in very small-cap companies. The largest small-cap company has a market cap of close to Rs.30,000 crore, which cannot be called small in the conventional sense. MF Industry classifies on top 250 companies by size as large and midcap. All the rest 4,800 listed companies are called small caps, irrespective of their size.
It is a well-known fact that the pace of growth is fastest in the early stages of companies. In India, due to factors such as GST, more businesses are transitioning from the unorganised to organised sectors, benefiting formal companies. Investors looking to participate in India’s true growth story should allocate funds to small cap funds, as they are likely to benefit the most in terms of sales and profits.
3. Around 75% of small-cap mutual funds have managed to outperform their respective benchmarks in September, what’s your speculation for the next three months of this calendar year?
The small-cap universe allows fund managers to choose investments from a broader range of companies. For example, in the chemicals industry, there are only 2 large-cap stocks, compared to 65 small-cap stocks in the small cap listed universe. Additionally, it has been observed that there can be a significant variance between the best-performing small caps and the worst-performing ones. The fund manager’s stock selection can have a significant positive impact on returns, leading to outperformance over the underlying index. We anticipate that in the next few years, the small-cap universe will continue to be a fertile breeding ground for astute stock picking, with funds continuing to outperform the index.
4. What specific criteria does TRUST Mutual Fund use to select small-cap stocks for its portfolio?
The TRUST Mutual Fund uses various filters to choose companies in its investment universe. In the small-cap sector, there are 800 companies with a market cap of over Rs 2000 crore. After applying the return generation criteria, there are about 400 companies with a ROE greater than 15%. Next, we consider companies that have increased profits by over 20% in the last 3 years, narrowing down the choices to 200 companies. The fund manager then creates a portfolio by selecting 40-60 stocks after conducting management meetings, thorough analysis, and extensive research.
We also utilise the Terminal Value Investing framework, which assesses companies based on Megatrends, Leadership, and Intangible Asset creation. This approach allows for the early identification of future industry leaders by focusing on genuine value creation within the company.
5. How does TRUST Mutual Fund plan to manage risks associated with investing in smaller companies, especially in volatile market conditions?
TRUST Mutual Fund has a strong risk management department and framework that regularly conducts stress tests on the different portfolios and their holdings. Various factors such as liquidity, trading volumes, and market trade velocity are reviewed periodically. Analysts and fund managers monitor company performance to identify potential weaknesses. Exposure is taken after evaluating market depth and risk. Recently, it has been noted that large cap stocks have shown more volatility compared to small cap stocks. TRUST MF systematically, meticulously, and professionally monitors and manages portfolio risks.