NFOs on Small and Mid-cap funds may face hurdles in a volatile market

Vinay Ranjan / March 13

The Mutual Fund (MF) industry is exploring the possibilities of offering new products to the investors. Two fund houses have already launched Gold exchange traded fund (Gold ETF). The Benchmark Mutual Fund has mobilised Rs 100 crore and the UTI MF is yet to come out with its numbers on the Gold ETF.

The MF is also waiting for both the government and the regulator to come out with a regulatory framework on the pension fund and the real estate mutual fund. They perceive these two products will have lot of potential to mobilize resources from the market.

But, the focus of the attention now is on the Small and Mid-cap fund which is drawing attention of the entire industry. The meltdown in the small and mid-cap stocks in the recent times in the midst of high volatility has generated a big debate whether the Small and Mid-cap funds are investors-friendly or not.

The DSP Merrill Lynch Mutual Fund was the first to offer Small and Mid-cap fund in the October-November last year. The fund house was successful in mobilising more than Rs 1,400 crore from the market.

After the success of DSP Merrill Lynch, the Sundaram BNP Paribas Mutual Fund and other fund house have launched a fund in this segment. The New Fund Offerings (NFOs) of the JM Financial Mutual Fund and Lotus Mutual Fund has also been opened for the investors this month.

More and more fund houses are planning to offer NFOs in the Small and Mid cap space. The DBS Chola Mutual Fund has filed its application with the Securities and Exchange Board of India (SEBI) last week.

On the occasion of JM financial MF's Small and Mid Cap fund's launch, Nimesh Kampani, Chairman, JM Financial Group himself said that the Indian economy has shown a robust secular growth for the last decade and this trend is expected to continue, fueling the growth of Indian companies. The engine of economic growth is shifting the momentum from large cap stocks to small and mid-cap segments, he added.

But, the market watchers are suspicious whether so many Small and Mid cap funds will be able to offer good returns to the investors. The reason being the prevailing volatility in the market that has hit the Small and Mid cap segment the most compared to the benchmark Sensex.

According to Bombay Stock Exchange (BSE), the Small cap index has come down by 4,94% or 328 points at 6,317 points in the six trading sessions between March 2 and March 12. Similarly, the BSE Mid Cap has lost 3.4% or 189 points at 5,276 points during the period under review.

Compared to this, the 30-stock Sensex has come down marginally by 0.13% or 16 points to close at 12,902 points during this period. However, the average intra-day volatility (the difference between the high and low) has been more than 300 points during this period.

It has been witnessed in the past too that the small and mid-cap segment was hit badly in a volatile market because the investors preferred to withdraw their investments from the stocks due to lack of confidence in these companies.

As a matter of fact, the Foreign Institutional Investors (FIIs) do not prefer to invest in the small and mid cap segment. A number of FIIs have openly said in a conference on the capital market organized by the FICCI in January this year in Mumbai that the small and mid companies need a proper research. And, they can invest only after a detailed research is carried in these companies.

In cue of this line of thinking, Sandip Shabharwal, Chief Investment Officer (CIO), JM Financial MF himself has struck a cautious note by stating, "The small and mid-cap stocks are generally under-researched and under-owned by institutional investors but these stocks have a huge demand and re-rating potential to give medium to long term growth to an investor's portfolio. We would identify and research the companies poised for take-off on behalf of our investors and constantly monitor the performance to give the best possible returns."

The fund houses are bullish on the small and mid cap segment. But, they need to be cautious while offering schemes in this segment.

The small and mid cap may be getting attractive ; but they are tender too to handle.