PGIM India Smallcap Fund to open on July 9; should you invest?

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Another New Fund Offer (NFO) is hitting the Street — this time in the smallcap space. PGIM India Mutual Fund has announced the launch of PGIM India Small Cap Fund, which will open for subscription on July 9 and close on July 23.

The NFO is coming at a time when valuations in the mid and smallcap space are well above historical averages. The benchmark index of the fund is Nifty Small Cap 100 Total Return Index. A smallcap fund invests a minimum of 65% of its corpus in the smallcap companies and the rest in other equity and equity related instruments, debt and money market instruments and units issued by InVITs and REITs. This fund will invest in overseas firms too.

Investment philosophy

The fund house expects the companies in the smallcap space to benefit from recent government measures as the economy recovers from the second wave of Covid-19.

“We believe that listed entities in the small-cap segment are the biggest beneficiaries of developments such as significant recovery in corporate earnings, expected in the coming months coupled with multiple tailwinds like the government trying to boost manufacturing through PLI schemes, lower taxation, and various concessions. Idea is to help investors gain exposure to business segments like construction, textiles, real estate, chemicals and agrochemicals, Industrials, paper and the like that find limited representation in the large-cap space,” says Ajit Menon, CEO, PGIM India Mutual Fund.

Fund manager

The fund will be managed by Aniruddha Naha (for equity investments), Kumaresh Ramakrishnan (for debt and money market investments) and Ravi Adukia (for overseas investments).

“The best pockets of returns over time are good quality small caps which are supported by earnings and reasonable valuations. They benefit from both the legs of earnings growth and a chance of a PE rerating, which helps them graduate from a small cap to a midcap and eventually a large cap,” says Aniruddha Naha, Sr. Fund Manager-Equity and fund manager for PGIM India Small Cap Fund

Should you invest?

If your portfolio requires a smallcap fund, you should consider the NFO as one of your options. But explore the other options too such as existing smallcap funds, and index funds in the smallcap space.

Cost plays a key role. The total expense ratio (TER) on smallcap index funds such as Motilal Oswal Nifty Smallcap 250 Index Fund and Aditya Birla Sun Life Nifty Smallcap 50 Index Fund will be the lowest. The TER on NFO will be known only after the funds raised are deployed, while existing smallcap active funds may charge you anywhere between 1-2%.

“The TER on NFOs are usually very competitive. It won’t make much a difference unless you are investing in an index fund,” says Gaurav Rastogi, CEO, Kuvera Wealth.

“The reason why you should invest in an NFO is if the fund house and the fund manager’s philosophy resonate with you. You don’t choose it just because you are getting the NAV at Rs 10. If you like the investment process and the fund management philosophy, you should choose the NFO. Else existing funds are fine,” he adds.

Omkeshwar Singh, Head – RankMF, Samco Group, however, does not prefer NFOs.

“We don’t advise on investing in an NFO because the portfolio is not known. Investors should wait for the fund house to deploy the money. Otherwise It is better to go for a scheme with quality holdings in the same space. Quality with a decent margin of safety is my advice,” he says.

So far as valuations are concerned, as long as you continue investing in the fund in a staggered manner, it should not bother you.