4 Reasons to Invest in Edelweiss Small Cap NFO

Edelweiss Mutual Fund has launched a new fund offer (NFO) focussed on small cap. The Edelweiss Small Cap Fund, which opens on January 18 and closes on February 1, An open-ended scheme predominantly investing in small cap stocks.

The objective of the scheme is to generate long-term capital appreciation from a portfolio which predominantly invests in equity and equity-related securities of small-cap companies

Why a small cap fund now

There are various arguments in favour of investing in small cap stocks. The most important one is that small caps outperform large caps. This trend holds true for both global and local. Why does this happen? Essentially, stock performance is a slave of earnings. Small caps have shown better earnings growth over the years and hence the outperformance.

  1. Price to Book value of Small Cap Index is Negative 5 compared to Large Cap index of 3 and Midcap Index of 13. ( A year ago Small Cap Index was at 33 Vs Today’s value of Negative 5 )
  2. The Edelweiss Small Cap Fund comes with a Smart Trigger enabled Plan (STeP). This is a unique feature that enables investors to invest in the Edelweiss Small Cap Fund in a staggered manner. The STeP facility is expected to reduce timing risk. You can opt for this facility only during the New Fund Offer (NFO) Period. The minimum investment amount under the STeP facility is Rs 25,000.
  3. Currently, small-cap index is down over 28% in last one year and thus may be a good time to invest in this category. Investment in small-caps generate relatively higher alpha – quality small cap outperform as they show stronger earnings growth compared to large caps. Small-caps also provides fund manager a wider basket to invest, over 2500 stocks are available in small-cap segment across many unique sectors not covered by large caps.
  4. There are various arguments in favour of investing in small cap stocks. The most important one is that small caps outperform large caps. This trend holds true for both global and local. Why does this happen? Essentially, stock performance is a slave of earnings. Small caps have shown better earnings growth over the years and hence the outperformance.

Having said that, small cap investment is not for the faint-hearted. Yes, the rewards are great in small caps but the risks are big too. So, investors have to be ready to remain invested for more than five years. More importantly, they have to remain patient during volatile markets such as 2008, 2011 and 2018. Investors should allocate a portion of their portfolio to small cap funds, preferably the satellite component of their MF portfolio.

Disclaimer – Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.

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