Small cap equity funds, as the name suggests, are mainly focused on making investments in various small cap equities. Small cap equities are usually stocks of companies that have lowest capitalization in stock indices such as the NSE Nifty 500. As a result of their smaller capitalization, these companies have huge growth potential, which enables small cap mutual funds to buy these value stocks for cheap and then sell them for much higher value when the company grows. That said, there is always the possibility that things don’t turn out the way the investor desires and this is the key risk of small cap investments. This is because the high growth potential of these funds is linked to success of the companies the fund is invested in, which may not happen, causing the price of the stock to crash. This high degree of volatility is the main reason that small cap equity funds are considered to be high risk investment options. However, few small cap equity mutual funds are completely invested exclusively in small cap stocks. Many also invest smaller amounts in debt/money market instruments, mid cap stocks and also various large cap stocks. This is usually done in order to increase liquidity as well as decrease overall volatility of the scheme.
Franklin India Smaller Companies Fund is an open ended small cap equity fund managed by Franklin Templeton Mutual Fund AMC, one of the leading asset management companies in India. This fund, as per its name, is mainly invested in small capitalization companies i.e. the smallest companies listed on stock indices such as Nifty 500 operating in India. As per historic data obtained over a period of approximately 10 years, this scheme is one of the best performers in its category having consistently outperformed its benchmark as well as its peers during most periods since its launch.
Franklin India Smaller Companies Fund Investment Objective
The Franklin India Smaller Companies Fund mentions capital appreciation in the long term as its primary objective, whereas generating income for its investors is a secondary objective for this mutual fund. In order to achieve these objectives, this scheme focuses on making investments in various small and mid-capitalization companies featured on the exchange. For purposes of investment, this scheme considers stocks than have a market capitalization smaller than the 100 largest companies featured on the much broader Nifty 500 index. The scheme uses the Nifty Midcap 100 as its benchmark to help compare its overall performance to prevailing market conditions.
Investment Style of Franklin India Smaller Companies Fund
Through past performance is no guarantee of how current investments will shape up in the future, a closer look at this small cap equity fund’s historic investment style does provide some clues of future performance. For starters, the fund has in recent times invested a lot more in midcap companies than small cap companies, which has made it overweight in the former and underweight in the latter category. This might be a key reason for the fund’s ability to contain losses better than its peers and even its benchmark during periods of sustained bearish market conditions.
It is also noteworthy that the fund managers have till date used a bottom-up style in order to choose a value stock and make their investment. Some of the criteria considered by the fund managers for selecting these investments include stable and efficient company management, low capital intensity of the business as well as the potential ability to generate high returns. A combination of these key factors can play a crucial role in ensuring that in the long term, these equity investments potentially generate high ROI.
Companies that are deemed incapable of generating free cash flow have been considered avoidable investment options by this scheme’s fund management. This has probably led to this fund being overweight in the mid cap equity investments category and underweight in the small cap investments category. As a result of being overweight in mid cap investments and its approx 10% allocation to large cap stocks, some of its peers have managed to outperform this fund during the recent market highs. However, this scheme continues to be a relatively low risk investment option while being capable of generating commensurate high returns among various mutual funds operating in the small cap equities space.
Risk Considerations for Franklin India Smaller Companies Fund Investors
The Franklin India Smaller Companies Fund focuses on making investments mainly in the small and mid-cap equity space. These equities feature a high potential for future growth as these segments usually comprise companies that are in their growth phase. However, this potential for high returns comes at the price of higher risk. This is because smaller equity stocks feature the possibility of being unsuccessful in their venture. This in turn results in a higher degree of market volatility for the overall portfolio of the fund, which can adversely affect performance in the long term.
The fund does attempt to mitigate this high small cap exposure risk to a certain extent through diversification across multiple sectors as well as by keeping a small portion of its capital invested in large cap companies whose stocks feature lower volatility. These diversification strategies have worked out well for the fund so far as it has consistently outperformed its benchmark as well as its peers since it was launched over a decade ago. Moreover, this scheme has managed to control its losses well during the bear phases since its launch. All things considered, this fund is an aggressive investment option with a moderately high risk rating and is thus considered suitable for risk tolerant investors seeking potentially high levels of capital appreciation in the long term.
Apart from the volatility risk, another risk to consider in case of all equity investments including small cap equity funds is the risk related to illiquidity. The root of this risk arises from the fact that it might not always be viable for the fund manager to liquidate an equity investment of the fund at short notice for a profit. This is especially the case during sudden market corrections when multiple redemption requests are placed by investors. At this time, the scheme may not have enough liquidity to cover all of such requests, which leads to exposure of the illiquidity risk. In order to mitigate such risks to a certain extent, many equity funds make investments in debt/money markets as well as cash/call investments.
Tax Considerations of the Franklin India Smaller Companies Fund
The Franklin India Smaller Companies Fund is an open ended equity fund mainly invested in small and mid cap companies. Being an equity-oriented scheme, the taxation rules of equity investments are applicable to this fund. As per existing rules, short term investments with applicable STCG (short term capital gains) tax of 15% on profits is applicable to investments held for periods shorter than or up to 1 year. This investment period in case of mutual funds is counted from the date of unit allotment and not from the date of investment. Additionally the 15% tax is applicable only on the profits that the investor makes when units are redeemed/switched.
In case units of this equity scheme are held for over 1 year from date of allotment before being redeemed / switched, LTCG (long term capital gains) taxation rule is applicable. As per current rules, LTCG in case of all equity investments are completely tax exempt. Dividends obtained by the investor of this scheme are also completely tax exempt and no DDT (dividend distribution tax) is payable either.
Key Features and Statistics of Franklin India Smaller Companies Fund
Inception: The inception of this open-ended equity scheme from Franklin Templeton Mutual Fund AMC occurred in January 2006.
Entry Load: This mutual fund like all others currently available in India has a zero entry load in line with a prior SEBI directive to all AMCs in India.
Exit Load: As with a majority of equity schemes, the current exit load applicable to this equity mutual fund is 1% of the amount redeemed. This load is only applicable to units that are redeemed or switched prior to completion of 1 year from the date of unit allotment.
Minimum Investment Amounts: If you are a new investor seeking to make your first investment in this scheme, you are mandatorily required to make a minimum Rs. 5000 lump sum investment. In case of SIP investments, the minimum investment amount is fixed at Rs. 500 for each installment however a minimum of 12 SIP investments of Rs. 500 or more have to be made in this case. The minimum single lump sum withdrawal allowed in case of this scheme is Rs. 1000. The minimum balance remaining after redemption at any time is also fixed at Rs. 5000.
Fund Manager: The Franklin India Smaller Companies Fund in currently managed by 3 fund managers- Mr. R. Janakiraman, Mr. Hari Shyamsunder and Mr. Srikesh Nair. Mr. R. Janakriraman has been a part of this scheme’s fund management team since February 2008. Before he joined Franklin Templeton Investments, he worked with leading companies such as UTI Securities Exchange Ltd., Citicorp Information Tech Ltd. and Indian Syntans Investments Pvt. Ltd. He has an Engineering degree and also a PG Diploma in Business Management. Mr. Hari Shyamsunder, one of the co-fund managers for Franklin India Smaller Companies Fund, worked as a business analyst with BG India Pvt. Ltd. before joining with Franklin Templeton Mutual Fund AMC. He is a Mechanical Engineering graduate from NIT Tiruchirapalli and also holds a PGDM from the prestigious IIM Bangalore. Mr. Shyamsunder is also a qualified Chartered Financial Accountant certified by the CFA Institute. Mr. Srikesh Nair, the final co-fund manager for this scheme, is a Marine Engineering graduate from BITS Pilani who started his career with Teekay Shipping. Subsequently he moved into the financial sector and was an analyst with Goldman Sachs Services Private Ltd. prior to joining Franklin Templeton Asset Management India Pvt. Ltd. He also holds a PG diploma in Management from MDI, Gurgaon.
Plans and Options for Franklin India Smaller Companies Fund
The following are the various plans and options available to investors of the Franklin India Smaller Companies Fund.
Direct Plan: The direct plan can be chosen by investors seeking to invest directly with the fund house or through specific registered intermediaries. The Franklin India Smaller Companies Fund direct plan features lower expense ratio than the regular plan, which can potentially provide higher returns in the long term. However, as it features a marginally higher NAV than the regular variant, direct plan returns tend to be only marginally higher than a similar investment made in the regular plan. Relatively few investors opt for the direct plan as it is available only through limited channels.
Regular Plan: The Franklin India Smaller Companies Fund regular plan is the most commonly availed scheme variant as it can be subscribed through multiple channels including broking houses and other third party intermediaries such as Paisabazaar.com. The regular plan has slightly lower NAV than the direct plan while featuring a slightly higher expense ratio, which may potentially lead to marginally lower returns than investing in direct plan. The growth option and dividend option of the scheme are available through both the direct plan and the regular plan.
Growth Option: The growth option of this equity mutual fund scheme can be availed by investors choosing either the direct or the regular plan of the fund. The growth option focuses solely on capital appreciation hence no interim dividend payouts can be obtained in this case. The profits made by investments of the scheme variants are reinvested back into the fund’s portfolio in order to increase the overall AUM of the fund and this leads to an automatic increase in the fund’s NAV. This increase in NAV over time allows investors to book profits when the units are redeemed or switched at a later date.
Dividend Option: The dividend option is available to investors with two sub types – dividend reinvest and dividend payout. In case of dividend payout, the investor receives the dividend paid by the fund house on a per unit basis directly in his/her registered bank account. If the investor has opted for the dividend-reinvest option, the dividend earned is automatically converted into units of equal value, which are added to the current units held by the investor. Dividends are declared on a per unit basis and they lead to a reduction in the fund’s NAV by a value equal to the dividend declared. Dividends earned from the Franklin India Smaller Companies Fund are completely tax free.
Top Holdings of Franklin India Smaller Companies Fund
The following are some top equity investments of Franklin India Smaller Companies Fund across various sectors.*
|Banking and Financial Services||Axis Bank, City Union Bank, HDFC Bank, ICICI Bank, IndusInd Bank, Karur Vysya, Yes Bank, Equitas Holding, Repco Home, etc.|
|Automotive||Tata Motors, Amara Raja Batteries, Banco Products, etc.|
|Chemical and Pharmaceuticals||Deepak Nitrite, Gujarat Heavy Chemicals, Atul, Gulf Oil Lubricants India, Berger Paints, PI Industries, Finolex Industries, FDC, IPCA Labs, JB Chemicals, etc.|
|Cement and Construction||Ramco Cements, Cera Sanitary, Kajaria Ceramic, Somany Ceramics, Ahluwalia, Ashoka Buildcon, Consolidated Construction Consortium, KNR Constructions, etc.|
|Engineering and Capital Goods||Carborundum, Grindwell Norton, Schaeffler India, SKF India, Techno Electric and Engineering Company, Greaves Cotton, Swaraj Engines, Lakshmi Machines, Triveni Engineering and Industries, etc.|
|Consumer Durables and Non-Durables||Blue Star, Johnson Control, Bata India, Jyothy Labs, etc.|
|Information Technology||eClerx Services, Cyient, Mindtree, NIIT Technologies, etc.|
|Manufacturing||MM Forgings, Ramkrishna Forging, Essel Propack, VIP Industries, Himatdingka Seide, etc.|
|Media and Entertainment||Entertainment Network India, HT Media, Jagran Prakashan, Music Broadcast, TV Today Network, etc.|
|Retail & Real Estate||Brigade Enterprises, Sobha, Aditya Birla Fashion & Retail, etc.|
|Services||Healthcare Global Enterprises, Gujarat Pipavav Port, Navkar Corporation, VRL Logistics,|
|Others||NESCO, Voltas, Gujarat Mineral Development Corporation, Pennar Industries, Mahanagar Gas, Finolex Cables, Cochin Shipyard, Kaveri Seed, Shankara Buildi, Navneet, etc.|
*The above information is for illustrative purposes only and the fund manager may decide to make more or fewer investment at a later date as per prevailing market conditions and SEBI guidelines.
Investing in Franklin India Smaller Companies Fund through Paisabazaar.com
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A range of mutual funds managed by Franklin Templeton Mutual Fund AMC in India are available through our portal. Hence you can easily purchase the regular growth option or regular dividend option of Franklin India Smaller Companies Fund through our web portal using net banking facility of all leading banks in India. On successful completion of your transaction, your units of the fund will be reflected in your investment account according to the fund’s applicable NAV.