Launching a Small Cap Fund – Funny Money Show

It was a dull afternoon yesterday. My computer was under repair for reinstallation of the OS and I was left looking at my phone screen. I decided to use my time productively and hence started to pour over data on the small cap mutual fund schemes. What I found was interesting.

There are 18 active open ended small cap funds in India as of Jan 2019. This number will go up to 20 by Feb 2019.  Out of these, 14 funds have completed at least 5 years in existence and 9 of them have completed 10 years of existence. No dearth of experience here!

Many of these funds are now known as small cap or become small cap post the SEBI recategorisation exercise in 2018.

Some funds such as HDFC Small Cap followed a different mandate earlier and only recently repositioned itself as a small cap fund.

Other funds were a combination of small & midcap funds, which changed to only small cap funds. For example, SBI Small & MidCap Fund as well as Franklin India Smaller Companies Fund.

A fund such as ICICI Pru Small cap was altogether a different fund. It was earlier known as the ICICI Pru Indo Asia Equity Fund.

One of the newer fund houses, Quant (not to be confused with Quantum), also has a small cap fund, which was earlier called the Quant Income Bond Fund. Can you beat that?

Today, about Rs. 38,000 crores of investments is managed across these small cap funds.

“Quite a number!” I almost said it aloud.

“Hey lazybum, what’s happening?” I heard a familiar voice. I raised my head to see my FunnyBone right there.

“Hey FunnyBone, long time! Where have you been?” I was pleasantly surprised and smiling.

“Why don’t you start a Small Cap Fund?” FunnyBone said it almost the next instant.

“What?” I was taken aback.

“With all those numbers and names you are looking at, I though you should be interested in starting your own small cap fund?” FunnyBone took the couch.

“How did you even come to know…”, I could hardly finish my sentence.

“Come on, you can’t hide anything from me!” said it with a mischievous smile.

I smiled back. “So, tell me more. Why do you say that I should start a small cap fund?”

FunnyBone laid back on the couch.”There is no better time than today to launch a small cap fund.”

“Why?”

“Well, I don’t need to tell the facts to you. But since you asked, here they are. Small caps have had a major slide in the past year, with most of the small cap stocks down 20%, 30%, some even 50%. That low price itself gives you a lot of leeway to buy into good small caps and ride the rally that is likely to ensue. Basically, there is no better time to be lucky with a small cap fund.”

“Still, I have no experience of managing a small cap fund.”

“Come on. Who cares? In any case, initially you do not need to put in much effort. Mr Market, with its rise, will help you build the initial track record. If this happens then for the next 2 to 3 years, you will be short of fingers to count the money inflow. I mean how many people find themselves placed in such a sweet spot.”

“I see. But what about the stock picking skill? Small caps is a tough space. One can horribly go wrong.”

“You know what the guru of investing says? That a rising tide lifts all boats. You are over thinking about skill. Here’s the Goddess of wealth knocking on your door and you want to first dress up!

“Do I need to remind you that more AUM means more management fees too? Make hay while the sun shines.” FunnyBone was persistent with its arguments.

“But, why will people give me money?”

“My dear, use some marketing skills. Can’t you get someone to make some nice power point slides with compelling data. Don’t forget to put the words PE, rerating, derating, strategic, option, cyclical, etc. Put information about a few companies (without naming them) and say how these companies stand to benefit from the coming change of sentiment and the rally.

Get distributors on board and give them the material to sell. There is a lot of money waiting on the sidelines which they could get for you.” FunnyBone spoke like an industry pro.

“But we should tell people not to invest lumpsum, in one go. In such as volatile space such as small caps, staggered investments work best.” I was being cautious.

“Who are you to stop people from investing? You will let people choose what they want to do. But I take your point. To work on this, create a little exotic strategy. I say introduce a SWING step. Get the money in a liquid fund and then if the index falls by a particular %, a trigger happens and some money automatically is moved to the small cap fund. This way you get investors to commit the money right in the beginning and also make your point about staggered investing.”

“Ah! That’s exotic and interesting! Though I fell, it can be kept simple with just an STP option.”

“No one cares about simplicity. Complexity sells.”

“Hmm. I can’t disagree with that. But you see, small caps is a tough space and for the kind of money already floating around, it can get tougher. We should keep a cap on the initial money we receive. We can limit the initial raise to Rs. 300 crores and close the fund for further subscription. We prove our mettle and then raise more.”

“Are you into business or philanthropy?” FunnyBone almost scolded me. “I told you the markets can pick up from here. Your distributors are ready, the sales pitch is in place. Just let the money come in. If investors want to invest, who are you to stop them?”

“It’s the right thing to do!” I said calmly.

“It’s a stupid thing to do. The only right thing is to make money.” FunnyBone winked.

My cell phone rang.

It was a client on the other side. He was asking about an NFO of a small cap fund. I asked him to send the email he had got.

When I told FunnyBone, it grinned. “So, they finally heard me. Well, you can remain in your cocoon. Don’t need to launch any small cap fund now. The job is done.”

“What do you mean?” I could not understand.

“The NFO your client mentioned… I had advised the mutual fund house to do it and with the same features I told you.”

“Really!” I was aghast.

“Well, I know how to make my money. Time to send them a bill for my consultancy charges.” FunnyBone stood up and walked away.

I took a while to come back to my senses only to say, “Good riddance!”