MUTUAL fund investors are increasingly getting a greater choice in terms of investment exposure that they can select. Initially, equity diversified funds meant mostly large-cap exposure and this was extended to mid-cap companies on a large scale with the arrival of mid-cap schemes.
Now, the situation has advanced with the possibility of investments in smallcap stocks that can be taken through the mutual funds’ route.
This opens up a new world of possibilities and while looking at this area there are several things that the investor must understand in terms of the impact that will generate.
Mixture of exposure: One of the first items that investors will realise once they look at the small-cap mutual fund space is that in many funds there will have a mixture of a midcap and small-cap exposure. This will happen because there are many fund houses that have launched small and mid-cap funds where the fund manager can allocate amounts between the two areas.
This often means a slight dilution in terms of the exposure that the individual might have been considering in case they were looking at only small-cap stocks for their investments.
However, a better way to look at this situation is by looking at the portfolio of these funds and then allocating the small-cap part of the portfolio to the eight that is present.
So, for example, if a 10 per cent exposure is required for the small caps out of a mutual fund portfolio of Rs 3 lakh then allocation to such funds would be Rs 30,000 and Rs 50,000 where the exposure to small caps in the funds are 33 per cent and 40 per cent respectively.
The only point is that along with the small-cap exposure a part of the mid cap exposure will also be automatically covered.
Definition: There are different definitions of a small-cap stocks through the mutu small-cap stock, and hence, this might again not be the same across mutual fund houses.
So, for one fund house small-cap stocks might be those whose market cap is less than the constituents of the CNX Midcap Index, while another would define small and mid-cap as those stocks whose market cap is lower than that of the highest market cap company in the CNX Midcap Index.
There might also be a slight difference between what the investor has in mind in terms of exposure and what the mutual fund actually provides as an investment option.
In such a situation the investor has to first see the definition that has been fixed by the various fund houses for the small-cap stocks and then match it with their requirements.
Availability: There is also a choice for the investor to take a direct exposure to small and micro-cap stocks by investing in them directly. Choosing a smallcap fund leads to a reduction in the risk element for the investor.
The risk for such stocks and exposure will always be higher than the largecap stocks as these are expected to be more volatile, but in many cases liquidity is a problem for direct investments.
This is restricted in case of mutual fund invest
ments. A mutual fund investment will also provide some diversification at a lower level of investment, and hence, this is an advantage for the investor.
Going below small: There is an increasing amount of differentiation that is being made in the mutual fund space and due to this there are finer classifications for funds.
Investors will witness that apart from small-cap funds, now, there is an option that goes beyond and invests in micro-cap stocks. This is nothing but a step ahead of small-cap stocks, and hence, this is a move slightly lower on the market cap trail.
Such funds are a different step on the risk return trail and they need to be considered as a separate type of holding in the portfolio. In some cases they might meet the criteria for the small-cap exposure and would go on to replace this in the investment portfolio.
Source :- My Digitalfc
