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It’s better To Look At Valuation Than Index When It Comes To Small Cap Stocks: PVK Mohan, Principal Mutual Fund

In an interview with BW Businessworld, PVK Mohan, Head – Equity at Principal Mutual Fund, discussed about small cap stocks and more

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As a group, small cap stocks have corrected heavily since January ’18. Would you say that they’ve formed an interim bottom at this stage?
Small cap stocks have indeed corrected sharply since January 2018 and have significantly underperformed the large cap indices. We do believe that companies with good fundamentals and operating in good businesses have reached a level where the risk reward looks favorable with a 2-3 year view; in a way close to a bottom if not bottomed out.

Despite the correction, small caps are quoting at a slight premium compared to large caps. History tells us that small caps reap better rewards when they start quoting at a discount to the large caps. Is it going to be different this time?
We believe it is better to look at valuations on a stock specific basis rather than an index when it comes to small cap stocks. We rely more on internal estimates when it comes to small cap stocks and do believe there exist several stocks in good businesses that are trading below large cap stock multiples on a 1-year forward or at least on a 2- year forward multiple. It is our endeavor to identify and invest in such stocks

Within small cap stocks, are there are pockets of outperformance you’re foreseeing… in terms of specific sectors or themes?
Currently, we do see opportunities in sectors such as specialty chemicals, construction, cement, hotels, financials, soft commodities etc to name a few 

Tell us about the STEP and auto trigger features of your upcoming NFO. Are they unique to your proposition?
Principal Small Cap Fund offers facilities like - Smart Trigger Enabled Plan (STEP) & Auto Trigger. STEP aims to protect against sharp fall in market as it invests in a staggered manner to mitigate market-timing risk. STEP facility is available only during the NFO. 

Through STEP facility, investors can spread their investment in Principal Small Cap Fund in 4 equal monthly instalments and only 25% of the application money is invested at the time of NFO in Principal Small Cap Fund, remaining 75% is invested in Principal Cash Management Fund. In the subsequent month, if the market falls 3% from the date of allotment, the STEP gets activated and it automatically shifts 25% of the initial investment to Principal Small Cap Fund. If there are no fluctuations in the market, the switch takes place at the following month end from Principal Cash Management Fund to Principal Small Cap Fund.

Auto Trigger facility allows investors to set a target rate of return and it automatically shifts appreciated amount to another fund when the target rate is achieved. Investors could use this facility to automatically rebalance their exposure to Small Caps.

Lastly, tell us about your general views on the markets at this time. We’ve seen a frustratingly range bound show for almost a year and a half now. Do you see a breakout happening post the elections?
We have seen the markets hit a new high as far as the large cap indices are concerned. With the uncertainty over the election results and some concerns on the fiscal deficit for FY20, we expect the markets to take a breather after the recent rally. However, over a 3- year basis, we do expect the markets to do better. We also expect better participation from more stocks/ sectors as also from good mix and small cap stocks which we believe could outperform the large cap indices.

The views contained herein are the independent views of the fund manager and are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. The views and strategies described may not be suitable for all investors.

It should be understood that any reference to the securities/ sectors in the document is only for illustration purpose. The information contained in this document does not constitute an offer to sell, or a solicitation of an offer to buy any security, investment product or service.  Investment involves risk. Past performance is not indicative of future performance and investors may not get back the full amount invested.

As an investor you are advised to conduct your own verification and consult your own financial and tax advisor before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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