Why small cap funds restrict fresh purchase and what to do now?

Recently, DSPBR Micro Cap fund restricted fresh purchase or SIP. It created a lot of inconvenience to people who were planning to start new SIP or a lumpsum investment. It was followed by Mirae Asset Emerging fund also to restrict fresh purchase. We believe more small cap funds can join them in restricting fresh fund inflows. The reason fund managers are giving is that they can not find stocks to park fresh inflows.

But why is that so? Let’s try to understand.

Lets say DSP BR Micro cap has 5,800 cr as on today. If average small cap stock has a market capital of 500 cr. In that case, if fund has to deploy even 1% of their cash into a stock, they will end up buying 58 cr worth of stocks and result in owning more than 10% of that company. Also it is not practical to buy 10% shares in less liquid stocks simply because there are not enough shares on the exchange.

Another logic given by investor is that they can invest in more stocks and own lesser percentage in those stocks? This is also not possible since if they start doing it, they will end up buying all kinds of stocks which they do not want to do. Also managing so many stocks is an added burden on fund performance.

This is the same reason why Warren Buffet says he finds Indian markets less liquid to park his money. Since his slice of investment converted into indian rupees is till too much for even large caps indian stocks.

So what do small cap investors do now? 

Option 1: Investors wait for these funds to open new subscription again. This may not happen in near future UNTIL there is significant redemption (meaning markets falls) OR Market cap of small cap stocks increases with time OR fund manager dumps fund’s philosophy and plunges into large caps.

Option 2: Investors invest in less popular mutual funds which are still open to new purchase. The flip side is they usually do not have a great track record to boast and that is a main reason they have not grown over the years. So this becomes sub-optimal option.

Option 3: In the absence of quality small cap mutual funds, investors can create their own small cap portfolio by outsourcing small cap expertise. This is where we pitch in. AI believes, there is a significant amount of wealth creation in equities provided our approach to investing is based on solid written framework AND our services are based on proven strategies of all time great investors. So what is stopping you from becoming your own fund manager and save expense ratio?

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