Investors with risk appetite and the stomach for high beta shares could consider buying into the ICICI Prudential Small Cap Fund. The scheme that was open only for subscriptions through the systematic investment plan (SIP) mode will now accept lump sum investments.
Wealth managers believe that with valuations in the small-cap space falling from their stratospheric highs, investors could increase exposure to this category of stocks.
“Last year, we gave a call to remain underweight on the small-cap space due to expensive valuations. This call played out well, as small-caps witnessed some sharp correction,” said S Naren, chief investment officer, ICICI Prudential Mutual Fund. “However, after this correction, we now believe that small-cap valuations have cooled off, providing a good opportunity to build exposure in this category. Keeping this in mind, we are opening lump sum investments in our small-cap fund.”
ICICI Pru Small Cap Fund
Over the past one year, valuations have corrected sharply, with the Nifty Small Cap 250 price to earnings (PE) ratio falling from a high of 121 in August 2018 to 46.2 now. The S&P BSE Small Cap index has corrected by 19.2% from its peak of 18,402 on April 30, 2018 to 14,873.
Fund managers believe there is scope for re-rating in P/E multiples, with earnings expected to improve across various sectors. Furthermore, developments over the past few days in the political space have lifted the market’s mood, enhancing the prospects at the riskier end of the investment spectrum. Analysts believe that due to the sluggishness in the secondary markets, price discovery of small-cap stocks is usually below full potential as these companies are still relatively less known.
Many investors stayed away from small-cap shares as valuations were rich and earnings had failed to catch up. Financial planners believe small companies have the potential to generate high returns over a long period of time but there could be high volatility in the short to medium-term.
“The small cap space is extremely volatile and investors opting for such a fund should have a time horizon of at least 10 years,” said Amol Joshi, founder, Plan Rupee.
In January 2018, ICICI Prudential closed the ICICI Pru PMS Smallcap Portfolio as valuations in the space were stretched. In July 2018, it closed lump sum investments in ICICI Pru Smallcap Fund due to high valuations and heightened volatility.
Many fund houses continue to impose restrictions on lump sum flows in their small cap funds. DSP Small Cap Fund and SBI Small cap Fund are two other fund houses that still do not accept lump sum investments.