Investment Objective*

The investment objective of the Scheme is to provide capital appreciation by primarily investing in small cap and mid-cap stocks. A small cap stock is defined as any company, which has a market capitalization of less than 10% of the market capitalization of the last stock in S&P CNX NIFTY. Mid-cap stock is defined as any company which has a market capitalization less than the market capitalization of the last stock in S&P CNX NIFTY but greater than 10% of the market capitalization of the last stock in S&P CNX NIFTY. *Source: Offer Document

Is this fund for you?

The fascination with mid cap funds continues and JM Small & Mid-Cap Fund (JMSMF), an open-ended fund, is the latest mid cap fund to join the bandwagon. Although, the NFO is similar to other mid cap funds in many aspects, there are some unique features that we have highlighted later in the note. Personalfn's view on investments in mid/small cap stocks: Mid cap companies tend to be under-researched ones, thereby providing an investment opportunity that is yet to be identified by the market. Investments in such companies offer high growth potential and the opportunity to clock above-average returns over the long-term horizon. On the flipside, since mid-sized companies are often under-researched, there is a fair chance that some reasons for "not investing" could be overlooked. As risk control measures and corporate governance tend to be neglected, the chance of manipulation in such companies is higher. Similarly, there is a possibility that the stock is illiquid even after considerable time making it an unviable proposition for the fund manager. Sandip Sabharwal, former fund manager at SBI Mutual Fund, who has become something of a 'mid cap guru' will manage JMSMF. Before we give our views on this point, let us understand what Sabharwal brings to the table in terms of expertise and experience. Sabharwal was associated with SBI Mutual Fund for over a decade-long period ending in 2005. The last 3 years of his tenure in SBI Mutual Fund saw him catapult SBI Mutual Fund's mid cap funds (particularly Magnum Global Fund) into a virtual brand name. It was during this period that his skills in identifying mid caps early on gained widespread recognition. However, certain transactions he had done earlier on in SBI Mutual Fund came under the scanner and are now being investigated by authorities. This was one reason why he quit Lotus India Mutual Fund (which he had joined after quitting SBI Mutual Fund). Either ways, we are not in a position to comment on this issue. To investors who are investing in JMSMF mainly for the value that Sabharwal can add to a mid cap portfolio, we would like to highlight the fallacy of such a move. To begin with, Sabharwal's association with JMSMF depends on the outcome of the pending investigations. More importantly, at Personalfn we have always been votaries of the team-based style of fund management. According to this style, systems and processes hold sway as opposed to a star fund manager's intuition. This ensures investment decisions are based on consensus. No single individual is deemed indispensable and therefore if and when a fund manager quits the fund house, investors are not unduly concerned because there is a team in place that takes all decisions based on pre-determined processes. Therefore, if you must opt for JMSMF do so because of the team and not because of an individual. As far as its investment team is concerned, it has achieved little of note. JM Financial Mutual Fund's track record in managing equity funds is rather dismal. For instance, JM Equity Fund (a diversified equity fund) has grown by 29.4% CAGR and 35.6% CAGR over 3-Yr and 5-Yr respectively. Compare this with the performance of well-managed diversified equity funds like DSP ML Opportunities (36.0% CAGR and 44.1% CAGR over 3-Yr and 5-Yr respectively) or HDFC Top 200 Fund (36.2% CAGR and 44.3 CAGR over 3-Yr and 5-Yr respectively). In our view, investors must give JMSMF a miss in favour of existing, well-managed mid cap funds like Franklin Prima Fund (36.0% CAGR and 48.0% CAGR over 3-Yr and 5-Yr respectively) and Sundaram BNP Paribas Select Midcap (52.6% CAGR over 3-Yr). They can evaluate JMSMF's performance over the long-term (3-5 years) and take a revised view at a later stage.

Portfolio Strategy

JMSMF will invest between 65%-100% of its assets in equity and related instruments. Of this, the scheme will invest between 20%-40% in small cap stocks and between 20%-80% in mid cap stocks. The fund can also park upto 35% of its assets in debt and money market instruments. Instruments Allocation Range Equity and equity related instruments 65%-100% Debt and money market instruments 0%-35% As per the fund house's definition, mid cap stocks have a market capitalisation less than the market capitalisation of the last stock in S&P CNX Nifty but greater than 10% of the market capitalisation of the last stock in S&P CNX Nifty, whereas small cap stocks are defined as those that have a market capitalisation of less than 10% of the market capitalisation of the last stock in S&P CNX Nifty. The fund house will adopt the bottom up (i.e. stock specific) investment approach as opposed to a top-down approach (theme/sector specific). JMSMF has indicated that it will hold a concentrated portfolio comprising between 25-50 stocks.

Fund Manager Profile

Sandip Sabharwal is Chief Investment Officer (Equity) JM Financial Mutual Fund. He is a Chemical Engineer from IIT-Delhi and holds a Post Graduate Diploma in Management from IIM-Bangalore. Before joining the AMC, he was associated with SBI Funds Management Pvt. Ltd. (from 1995-2005) where he began as a research analyst and later headed the equity fund management team. He was also briefly associated with Lotus India Asset Management Company Pvt. Ltd. as Chief Investment Officer - Equity.

Outlook

Investing in JMSMF will be subject to the risks that have come to be closely associated with small and mid cap stocks i.e. above average volatility. Mid cap stocks can add considerably to the investor's portfolio provided he has tolerance for the volatility. However, over the long-term (3-5 years in case of mid caps), the risk of investing in these companies can be considerably lower. In JMSMF's case, the flexibility to invest upto 35% in debt should stand it in good stead to counter stock market volatility.

By Personalfn.com, a financial planning initiative. It can be reached at info@personalfn.com. Personalfn.com also publishes a free-to-download financial planning guide, Money Simplified. To get a copy of the latest issue - How ULIPs fit in - please click here.