Small-cap funds, the most sought-after mutual fund category that has attracted majority of investor money in the last three years, have a problem — spotting specialized talent to run investments.
As a result, several of them have managers running both large-cap and small-cap funds or have co-management teams in place or, in some instances, have even the chief investment officers (CIOs) listed as the primary fund manager of small-cap funds.
Investors have put over ₹1.35 trillion into small-cap funds in three years through February, yet the number of fund managers equipped to run these schemes, which demands a distinct skill set, remains limited.
Assets managed by small cap mutual funds more than doubled to ₹3.64 trillion in February from ₹1.32 trillion in February 2023. Number of folios, as mutual fund accounts are termed, in the segment also more than doubled to 28 million in the same period, according to industry lobby Association of Mutual Funds of India or Amfi.
Mint analyzed all the small cap schemes and found that there are 31 asset management companies (AMCs) that offer both small-cap and large-cap schemes.
Of these, 12 mutual funds have the same manager overseeing both large-cap and small-cap funds.
Further, among a total of 34 small-cap schemes, 11 named the CIO or head of equities as the primary fund manager.
Different kind of work
Unlike in large-cap stocks where research coverage is vast, spotting good small stocks requires digging and peeling layers. "In large cap or midcap funds, the manager focus is on setting sector weights relative to the benchmark. But in smallcap funds this doesn't work," said Aarati Krishnan, head of advisory function at Primeinvestor.in, a research platform.
To be sure, there are no distinct regulations of the Securities Exchange Board of India, or Sebi, that mandate mutual funds to have distinct fund managers for each type of equity fund. Yet, “giving a small-cap fund to a large-cap fund manager is like assigning a consumption fund to someone with expertise in banking,” a senior AMC executive said.
A second executive managing one of the top five small-cap schemes noted that small-cap investing often involves identifying red flags through extensive due diligence—continuous engagement with management, site visits, and on-ground research—which requires time and focus.
What about the CIO?
Dhirendra Kumar, founder and CEO of Value Research, a mutual fund and investing database company, said CIOs help de-risk investment strategies at the small-cap funds. “Though young fund managers can have a contrarian, risky view on a company, a CIO brings years of experience to know if something is fishy," Kumar said. "I will be worried if only a CIO is handling a small-cap fund."
Krishnan of PrimeInvestor said an AMC's CIO managing its small-cap “may not be ideal as they also have broader responsibilities”.
In Mint's analysis, there were four mutual funds where the CIO or head of equities is the sole fund manager for a small-cap scheme—SBI Mutual Fund, HSBC Mutual Fund, HDFC Mutual Fund, and DSP Mutual Fund. Together, these account for 28% of small-cap mutual fund assets as of February-end, according to Amfi.
SBI MF and DSP MF declined to comment. HSBC MF and HDFC MF did not respond to Mint’s emails.
Co-manager, team structures
Motilal Oswal Mutual Fund and Union Mutual Fund are examples of fund houses that have overlapping fund managers for small-cap and large-cap funds, which is managed together with co-managers. Invesco has a CIO managing its small-cap scheme.
"Having more than one fund manager involved encourages collaboration and cross‑pollination of ideas across market capitalizations,” said Prateek Agrawal, managing director and chief executive officer at Motilal Oswal AMC on email, adding accountability rests with the primary fund manager.
Union Mutual Fund did not respond to Mint’s queries.
Invesco Mutual Fund follows an investment “process-led approach” that has analysts evaluate a company or sector and putting it across to a 20-member team, Saurabh Nanavati, its MD and CEO said responding to a Mint query.
“Fund managers then construct portfolios from this pool of categorized stocks, which have been arrived at after a lot of analysis and joint decision making,” he added. “The system has worked well for us for the last 18 years and we intend to continue with the same.”
Another fund, PGIM Mutual Fund, which also has an overlap in fund management, echoed this view. “Our structure is well defined and does not come at the expense of any systemic risks. However, we will continue with the co-fund manager model for oversight, process‑driven approach and ensure better and consistent investor outcomes,” said Abhishek Tiwari, CEO, PGIM India Asset Management Ltd in a reply to Mint.
What partly explains the talent gap is that the small-cap segment is still evolving. “The small-cap space is only now gaining depth. There is a natural shortage of experienced fund managers, although the market itself is growing,” said the first AMC executive quoted without name earlier.
Helios Mutual Fund, which has a CIO managing its small cap fund, said that this was a deliberate choice.
“CIO directly overseeing the strategy enhances decision-making quality and alignment, particularly in a segment like small caps where discipline and experience is critical,” said a company spokesperson in response to Mint’s queries.
Why is talent limited, though?
Successful mutual fund managers leaving to start their own Portfolio Management Services (PMS) firms or Alternative Investment Funds (AIFs) is one reason for the talent shortage.
“Small-cap talent is more visible in PMS structures. A common trajectory is that fund managers build a track record in mutual funds and then branch out to launch their own PMS. This creates a natural leakage of talent from mutual funds,” said Pramod Gubbi, co-founder of Marcellus Investment Managers.
For instance, Prashant Jain, former CIO at HDFC Mutual Fund, went on to start 3P Investment Managers AIF. Similarly, Pankaj Tibrewal, formerly of Kotak AMC, launched Ikigai Asset Manager. There are several other such examples.
Tight Sebi regulations on mutual funds limit a fund manager’s flexibility compared to PMS structures.
“There is a maximum 10% exposure to a single stock, no performance fees, and the need to manage large, open-ended pools of retail money that require liquidity,” said Gubbi. “PMS structures, in contrast, offer greater flexibility in position sizing, risk-taking, and portfolio concentration.”