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Small cap is a space where you buy in panic and wait for bull market to sell: Samir Rachh of Nippon Mutual Fund

Spoke to Samir Rachh, fund manager – equity investments, Nippon India Mutual Fund, to find out what exactly is going on in the small cap space.

, ET Online|
Last Updated: Apr 10, 2020, 09.52 AM IST
ET Online
samir racch
There is a sale going on in the small cap space, say a group of investors. The other group says the space is finished, most small companies would not survive the current economic lockdown. Shivani Bazaz of ETMutualFunds.com spoke to Samir Rachh, fund manager – equity investments, Nippon India Mutual Fund, to find out what exactly is going on in the small cap space. Rachh manages Nippon India Small Cap Fund, which has an AUM of Rs 8,567 crore as on Feb 29. Edited interview.

Nippon India Mutual Fund has decided to open lumpsum investments in Nippon India Small Cap Fund after a gap of two years. Do you think the small cap space has become attractive after the recent sharp fall in the market?
Yes, we think the small cap space has become attractive. The kind of damage in this space is humongous. Almost 55% of companies in this space have fallen by more than 40% in the last few months.

As far as valuations are concerned, as of last week, on a trailing basis, 40% companies in this space were available at EV/EBITDA of less than 6; As much as 43% companies were available at a P/E of less than 10 and around 51% companies were available at P/BV of less than 1.2. Thus, there are values around and there is blood on the street. These are normally fertile hunting grounds for long-term stock pickers.

Since several small cap schemes are reopening for lumpsum investments after a few years, many investors want to know whether this is a great time to invest lumpsum in these schemes. Do you think it is a good idea to invest a lumpsum in this market?

Nobody can predict the market top or bottom exactly. We don’t know frankly whether markets have already bottomed out or would bottom out in next few months. But after such a sharp fall in prices, risk-reward is in favour. We feel further significant down side from here is going to be limited in many stocks. Also, not all the stocks are going to bottom out at same time. Some would bounce back beforehand.

Therefore, for someone who was sitting on the sidelines all these while, it’s time to be aggressive and invest a lumpsum. For our existing investors who has seen huge erosion in value, this is time to put lumpsum and average. The best time to buy is when there is still a scenario of gloom and at the same time there are enough values around.

Our view is that we are somewhere close to peak in terms of negative news on Corvid 19, thanks to the social media noise level are much higher. India is not affected as much as many other advanced countries. Best time to act is when there is still uncertainty, but odds are in your favour.

The current valuations may be cheap, but investment experts believe many small companies are unlikely to survive the Covid-19 crisis? Are these fears exaggerated?
Yes, you are right. None of us have seen something like this, a complete shutdown. Stoppage of business activities while the fixed cost meter is running could be disastrous for companies with a high fixed cost, high debt, high working capital and low liquidity and average quality managements. The impact of this is going to be huge on corporate numbers. In fact, June 20 quarter numbers would be one of the worst numbers we would have ever seen. These are the times where weaker companies would be quite vulnerable.

But it is also true that in times like this, one gets bargains. If one can separate between men and boys, rewards could be very good. We are not suggesting that we will buy everything that is cheap. We will take our picks, based on our research, based on our experience. Our view is that the companies which would survive these tough times, would emerge stronger.

The revival of small cap stocks are also severely contested. Many believe the segment will take a while to show any signs of revival. What’s your view?
It’s quite likely that whenever market revival happens, large companies would be the first to bounce back. Therefore, we are not suggesting that one should be overweight on small cap stocks. At the same time, it is not a good idea to completely ignore this space. It is risky to time and wait for the exact bottom. In the process one may miss a good part of recovery. One will have to act, when there are bargains available. Small caps are around 15% of the market. Have at least 15% weight now. Be overweight when you feel more comfortable but don’t completely ignore the small cap space. Follow asset allocation discipline.

Many investors seem to be over-optimistic or extra adventurous during the crisis. They are too eager to invest in small cap schemes after the recent fall to make quick bucks. What is your advice to them?
If you want to see real beauty, the real potential of small cap space, come for the long term. To experience full potential of the small cap investing, it is very important for one bull market to pass through your small cap portfolio. Look at the past bull markets and the kind of return which gets created in this space during Bull markets. Have patience to stay put till that time. Bull market comes. If you are coming here just to trade, or for the short term, it is not worth it.

Why should one invest in small cap schemes at this juncture? And what should be their investment strategy?
Small Caps are roughly 15% of the market cap. At this stage don’t be overweight just come with equal weight allocation. But it is not advisable to ignore this space completely.

What is your advice to the new mutual fund investors foraying into the small cap space at this moment?
Come with a long-term outlook. This is a volatile space. Therefore, you should have the right allocation as per your risk profile. The right allocation is important, so that one is not perturbed by interim volatility. Come with a long-term outlook of at least 5 to 7 years.

Also, I want to tell them up front that, at any given time if your 5-year CAGR - I repeat not one, two- or three-year CAGR, but five-year CAGR -start exceed 20-25% per annum, be vigilant. Stop your SIPs and start thinking of how you can start taking money home by starting to withdraw systematically or in a lumpsum manner. Take your profits home. This is a space where you have to buy in panic and wait till bull markets to sell.

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