IDFC Emerging Businesses Fund – Should you invest?

Summary

IDFC Mutual Fund house is launching a new fund “IDFC Emerging Businesses Fund”. NFO opens on 3rd Feb and closes of 17th Feb 2020. This is open ended scheme, so you can invest in it anytime later as well. Let’s check if you should invest in fund at this stage.

1. What does small cap fund mean

Fund comes into category called Equity – Small Cap. Which means it will be predominantly investing in small cap companies. These are listed companies ranked 251 onward as far as market capitalization is concerned. In layman terms, maximum money would be invested in companies which are not large or even medium size ( in top 250) but instead in relatively smaller ones.

2. Risks and returns

Since investment is being made in small size of companies, this is high risk – high returns category. Expect fund to have lot of volatility. In my personal opinion, small cap funds are suitable only for very long term investment. Something like 8 to 10 years or more. Based on your risk profile, you should have some allocation to this category as that will boost your overall returns but if you can’t take volatility or your horizon is say only upto 5 years or so, I would feel large cap or mid cap are safer bets. But for someone with aggressive risk profile and long term horizon, funds in this category should reward good.

3. Portfolio & Asset allocation

If you refer Scheme Information Document, you will find that between 65 to 100 % of funds assets would be invested in Indian small cap companies. So maximum upto 35% could be invested in other companies which are not Indian small cap. Those could be large cap, midcap , foreign or that part could even be invested in debt instruments. So mainly returns and risk would be dependent on fund manager’s call in small companies.

4. Fund Manager

Fund Manager is a key factor in actively managed funds. Mr. Anoop Bhaskar will be fund manager for this scheme. He is with IDFC since 2016 prior to which he was with UTI Asset Management Company. He was with Sundaram Asset Management company in earlier part. So overall, he is very experience person to manage our money. His recent performance is not that great though.

Other schemes managed / co managed by him are as under. He joined IDFC in Feb 2016. So we can refer performance of these schemes in last 3 – 4 years to see his investment style and performance. Overall, I feel his schemes are not top ranked in any category. With most schemes in bottom half of ranking from performance perspective, his calls in recent years seem not been proven rewarding to investors.

4. USP of this fund ?

Well. To be very honest, I fail to understand what is unique selling point for this fund. I can understand IDFC had to launch a small cap fund since they don’t have any fund in this category and every fund house would like to have all different schemes to attract investors. But from investor perspective, there is nothing unique in this small cap fund compared to ones already present in market. There is possibility of investing in foreign market some part of overall asset, but that is not core focus of this fund. Or at least offer document does not indicate anything in that direction. So its just one more new small cap fund.

5. Who are peers of IDFC Emerging Business Fund

There are very good funds already available in small cap Category. SBI small cap Fund has delivered spectacular returns over long run. Axis small cap Fund and L&T Emerging Business Fund (disclosure – I am invested in this) are other ones. SBI small cap fund have good long term proven track record, which makes me wonder why would I invest or suggest this new fund without any new feature to anyone.

6. Risk factors

1) First and foremost, you should understand underlying asset is equity. So all the risks associated with equity are applicable.

2) Being a small cap fund, do expect volatility as significant investment would be in small companies.

3) Small cap funds take beating in bad periods. These are the companies with comparatively maximum risk and if economy takes wrong turn, prices of these companies are likely to fall significantly compared to Large or Mid cap funds.

7. Conclusion

known devil is better than unknown angle

Should you invest in IDFC Emerging Business Fund? My opinion is “No. At this stage”. If you really want to invest in small cap fund, there is a very good proven fund which is SBI Small cap Fund. You should stick with this fund with long history rather than taking chance with new kid on the block. Also performance of fund manager in other schemes is not something to put your bet on. Let fund perform for year or two and if it beats other funds in this category or at least comes in top 25% of schemes, we can consider investing in same later. But for now, we would be better off giving this NFO a pass.

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