Product crack: Sundaram Select Micro Cap Series IX

Sundaram Select Micro Cap Series IX (SSM9) is a 5-year closed-end equity scheme. Being a micro-cap, it will invest in small-sized companies. It defines a micro-cap company as one whose market capitalisation is equal to or lower than the 301st stock in the National Stock Exchange. In MF parlance, typically, a micro–cap company is considered to be even smaller than a small-sized company. This is the ninth in the series of closed-end micro–cap funds that Sundaram Asset Management Co. Ltd has launched. The fund will invest in cyclical sectors that are expected to turn around once the economy picks up, such as cement, industrial and capital goods, and others like automobiles, auto ancillaries and housing materials.

WHAT WORKS...

The fund will deploy its initial corpus at a time when the equity markets have corrected sharply. Though experts say that equity valuations are not very cheap, SSM9 will still get to pick stocks at valuations lower than a year ago. Being a micro–cap fund, the fund manager will manage SSM9 actively; more frequent profit booking than other long-term oriented, buy and hold funds, and will also aim to declare dividend frequently. Remember, dividends come out of your own corpus, so that’s not extra earnings. But for those who seek to make the most of opportunities, such a dividend policy helps.

Although closed-end funds have come under a lot of criticism, especially Sundaram AMC, since it has launched many such schemes in the past two years, the performance most of its schemes has set the charts on fire. The first six schemes in this series that have completed at least a year in existence have returned 32% on an average in the past one-year period.

...WHAT DOESN’T

The closed-end structure can backfire if equity markets remain volatile for long. Though the fund will come up for maturity after five years and equity markets are expected to pick up by then, there’s no telling as to where the markets would be when SSM9 comes up for redemption. If the markets fall sharply in months leading up to redemption, your gains could get wiped out. The fund house, however, has said that it would start liquidating its portfolio as it gets close to redemption time. Frequent dividend payout is also a strategy that some closed-end funds have used to return money.

MINT MONEY TAKE

According to its Riskometer (product labelling is mandatory), SSM9 is rated ‘Moderately High’. We feel the scheme should ideally be rated as ‘High’. The fund manager, however, stands by the Riskometer rating as he feels that closed-end funds don’t face redemption pressure and so the scheme not exposed to market vagaries.

Avoid closed-end funds unless they offer something unique. However, to make the most of a micro-cap strategy, a closed-end structure works as you need to stay invested for at least 2-3 year period. Consider SSM9 only if you understand risks of a closed-end structure. Also, micro-cap schemes are more volatile than other diversified equity funds.