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Small Caps: Potential to create wealth and generate alpha over the long term

As the economy revives and demand plays out, the full value chain across sectors benefits from the demand revival, and this includes small cap companies too. Along with economic data improving, corporate profitability of small cap companies can be expected to improve. Small Cap companies are defined as stock beyond 250 companies ranked by market capitalization, as declared by AMFI. Companies which have survived the past downcycle, especially in the small cap space, have weathered a very tough time and are set to benefit from better demand as:

Demand is recovering across sectors

Unorganized weaker companies might have exited the business, reducing the competitive intensity

This would entail, better top line, margins, profits and cashflows for the surviving set of companies. Small Cap companies remain undiscovered, as they predominantly are in the small cap space and are mispriced. The potential upgrade in profitability can cause decent rerating in such small, niche businesses. Small Caps therefore provide an opportunity to participate in small niche businesses, which could overtime scale up into mid-sized and large cap businesses.

Why Small Caps Now?

Meaningful exposure to sectors where large cap or mid cap companies have less presence, examples of such industries could be chemicals, textiles, paper, sugar, home improvement businesses, barring a few mid caps the overall auto ancillary businesses, construction, etc.

Small Cap companies provide some unique opportunities:

Market share gain from established players
Ability to scale-up
Niche businesses / Emerging businesses

Small Caps are generally under-researched and under-owned compared to other segments of the market. This provides an opportunity for stock picking in the long term.

Small Caps of today can become mid caps or large caps of tomorrow, as they grow their revenues, profits and achieve scale.

Potential to create wealth and generate alpha over the long term; due to the under-researched nature of the small cap segment, opportunity for stock picking continues to exist.

Why invest in PGIM India Small Cap Fund?

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The investment objective of the scheme is to achieve long term capital appreciation by predominantly investing in equity and equity related instruments of small cap companies. The scheme’s investment strategy is to capture opportunities available in the small cap segment.

The fund shall invest a minimum of 65% of its corpus in small cap companies. The scheme may also seek to participate in the growth of other equity and equity related instruments in order to achieve optimal portfolio construction.

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The portfolio will be built utilizing a combination of the top-down and bottom-up portfolio construction process, focusing on the fundamentals of each stock, including quality of management.

The fund manager will aim to build a diversified portfolio with exposure across sectors, given the fact that small cap stocks present a much wider universe compared to large and mid cap listed universe.

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The Scheme may also invest a certain portion of its corpus in debt and money market securities. Investment in debt securities will be guided by credit quality, liquidity, interest rates and their outlook.

Who should invest in PGIM India Small Cap Fund?

Investors with an investment horizon of atleast 5 years or more

Investors looking to complement their existing core equity portfolio, with a potential to earn higher risk-adjusted returns

Investors having a commensurate risk appetite associated with the small cap segment

PGIM India Small Cap Fund: Investment Approach

Minimum 65% allocation to small cap stocks. Small caps are defined as stocks beyond the top 250 as ranked by market cap*
Stocks selection and portfolio construction on the basis of:
- Growth At Reasonable Price (GARP)
- Fundamentals driven, bottom-up stock picking approach
- Focus on ROE, Growth, FCF and leverage ratios

Stock price over the medium to long term, track the fundamentals of the company
Companies which are backed by good management and demonstrate the ability to scale-up
Higher multiple for higher expected growth in the future, leading to re-rating of the stock

Earnings Growth+

Re-rating=

Market Cap Expansion

*List published by AMFI on a half-yearly basis.

PGIM India Small Cap Fund Features

Asset Allocation

Instruments	Indicative allocations (% of total assets)		Risk profile
Instruments	Minimum	Maximum	High/Medium/Low
Equity & Equity Related Instruments of Small Cap Companies	65%	100%	Medium to High
Equity & Equity Related Instruments of other companies	0%	35%	Medium to High
Debt and Money Market instruments (including cash and cash equivalents), Liquid and Debt Schemes of Mutual Fund	0%	35%	Low to Medium
Units issued by InVITs and REITs	0%	10%	Medium to High

For more details on Asset Allocation, please refer Scheme Information Document of the Scheme on www.pgimindiamf.com

Definition of Large Cap, Mid Cap and Small Cap Companies: Large Cap Companies shall be 1st -100th company in terms of full market capitalization. Mid Cap Companies shall be 101st -250th company in terms of full market capitalization; and Small Cap Companies shall be 251st company onwards in terms of full market capitalization as per the list prepared by AMFI.

Fund Managers

Mr. Aniruddha Naha

Aniruddha Naha, Senior Fund Manager – Equity. He also manages PGIM India Balanced Advantage Fund and PGIM India Midcap Opportunities Fund. Aniruddha has done his Master’s in finance & Control and has over 22 years of industry experience in the equity and debt market.

Mr. Ravi Adukia

Ravi Adukia is an Equity Analyst and dedicated Fund Manager for overseas investment. He also manages PGIM India Balanced Advantage Fund, PGIM India Hybrid Equity Fund, PGIM India Emerging Markets Equity Fund and PGIM India Global Equity Opportunities Fund. He has over 16 years of experience in Indian financial markets, primarily in equity research.

Mr. Kunal Jain

Kunal Jain, Fund Manager -Fixed Income. He has over 11 years of experience in the fund management of fixed income securities. Among others, he manages PGIM India Insta Cash Fund, PGIM India Ultra Short Term Fund, PGIM India Money Market Fund and PGIM India Overnight Fund.

Benchmark

NIFTY Smallcap 250 TRI

Loads

Entry Load: Not Applicable

Exit Load

10% of the units allotted may be redeemed/switched-out to debt schemes without any exit load within 90 days from the date of allotment;

Any redemptions/switch-outs in excess of the above mentioned limit would be subject to an exit load of 0.50%, if the units are redeemed/switched-out to debt schemes/PGIM India Arbitrage Fund within 90 days from the date of allotment of units;

Nil - If the units are redeemed/ switched-out after 90 days from the date of allotment of units;

No exit load will be charged for switches and STP between any open-ended equity scheme, hybrid scheme (except PGIM India Arbitrage Fund) and fund of funds scheme.

The entire exit load (net of Goods and Services tax), charged, if any, shall be credited to the Scheme.

Plans and Options

Regular Plan and Direct Plan. Growth, Payout of Income Distribution cum Capital Withdrawal facility (IDCW-Payout) and Reinvestment of Income Distribution cum Capital Withdrawal facility (IDCW- Reinvestment).

Minimum Amount of Investment

Initial Purchase – Minimum of ₹ 5,000/- and in multiples of ₹ 1/- thereafter. Additional Purchase - Minimum of ₹ 1,000/- and in multiples of ₹ 1/- thereafter.

Systematic Investment Plan (SIP)

Minimum 5 installments of ₹ 1,000/- each and in multiples of ₹ 1/- thereafter for Monthly and Quarterly SIP. Minimum SIP Top up amount for Monthly and Quarterly SIP is ₹ 100/- and in multiples of ₹ 1/-

This product is suitable for investors who are seeking*

Capital appreciation over a long period of time
Investment in equity and equity related instruments of small cap companies
Degree of risk – Very HIGH

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Very High - Investors understand that their principal will be at very high risk.

The information contained herein is provided by PGIM India Asset Management Company (the AMC) (on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. However, the AMC cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance* (or such earlier date as referenced herein) and is subject to change without notice. The AMC has no obligation to update any or all of such information; nor does the AMC make any express or implied warranties or representations as to its completeness or accuracy. There can be no assurance that any forecast made herein will be realized. These materials do not take into account individual investor’s objectives, needs or circumstances or the suitability of any securities, financial instruments or investment strategies described herein for particular investor. Hence, each investor is advised to consult his or her own professional investment / tax advisor / consultant for advice in this regard. The information contained herein is provided on the basis of and subject to the explanations, caveats and warnings set out elsewhere herein. These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Distribution of these materials to any person other than the person to whom it was originally delivered and to such person’s advisers is unauthorized, and any reproduction of these materials, in whole or in part without the prior consent of the AMC, is prohibited. The views of the Fund Manager should not be construed as an advice and investors must make their own investment decisions regarding investment / disinvestment in securities market and / or suitability of the fund based on their specific investment objectives and financial positions and using such independent advisors as they believe necessary.

© 2021 Prudential Financial, Inc. (PFI) and its related entities. PGIM, the PGIM logo, and the Rock symbol are service marks of PFI and its related entities, registered in many jurisdictions worldwide.Mutual Fund investments are subject to market risks, read all scheme related documents carefully.