Product crack: Sundaram Select Micro Cap-Series I
It has a five-year lock-in period, which means you will not be able to redeem before its maturity
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Sundaram Asset Management Co. Ltd has launched Sundaram Select Micro Cap-Series I—a closed-end equity scheme. It has a five-year lock-in period, which means you will not be able to redeem your money before its maturity. You can apply for units only during the new fund offer (NFO) period, which is open till 30 December.
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Features
The investment objective of the fund is to pick companies whose market capitalization is equal to or lower than that of the top 301 stocks by market cap on the National Stock Exchange (NSE) at the time of investment. The fund manager (S. Krishnakumar) will predominantly invest in multinational company (MNC) stocks from the micro-cap space. However, the fund is allowed to invest in stocks other than micro-cap MNCs. The fund will predominantly invest in growth cycle sectors. Krishnakumar feels that since small-caps are trading at a significant discount to large-caps, it is prudent to invest in them.
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The performance of the scheme is benchmarked to S&P BSE Small Cap index. At the moment, the index is trading at a 47% discount to its historical high in January 2008. The fund manager feels that since micro-caps are trading at a significant discount, they are set to outperform large-caps. The fund will be listed on NSE. Since you can’t redeem the units before maturity, if you need liquidity, you will have to sell the units on the stock exchange. The fund’s dividend option will pay dividend only when it makes 60% profit in the overall portfolio. It will have roughly 30 stocks. It’s unlikely that the fund will hold all the stocks for the full five-year period.
What’s good?
If you look at the five-year returns of the fund house’s mid- and small-cap funds, it has given over 12% returns, according to Value Research. Incidentally, all these funds are managed by Krishnakumar. The fund house gives you an option to move the proceeds to another scheme of the fund house on maturity, free of cost.
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What’s bad?
Since this is a closed-end fund, you have to wait for five years till maturity. Micro-cap stocks are generally more volatile than large-cap or mid-cap stocks. They are also generally illiquid in terms of trading volumes. So, liquidity risks in the portfolio are higher. A five-year period with an exact end date is timing the market. For long-term investors, such timing may or may not give results. Being a new scheme it doesn’t have a track record.
Mint Money take
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It is risky to time the markets so precisely. But if you are looking for such a specific universe of stocks, you can opt for this scheme. The only other reason to go for it is if you are convinced about the fund manager’s outlook on stock picks, timing and direction. Since there are open-ended funds available with similar mandates, if you want to stay invested in equity for a longer period, pick one that doesn’t seek to redeem money at the end of the lock-in period and carries on as an open-ended scheme.
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