Smaller the better?

NEW FUND OFFERING

Franklin India Smaller Companies Fund is a closed-end fund which proposes to tap the higher return potential in small cap companies.

At long last a close-ended fund has hit the markets. Franklin Templeton Mutual Fund's latest offering, which is a new addition to the thinly populated closed-end equity diversified category, is called Franklin India Smaller Companies Fund. The well-known Morgan Stanley Growth Fund is the only other closed-end equity diversified fund in India. 
 

FRANKLIN TEMPLETON - DIVERSIFIED EQUITY SCHEMES Returns in % as on December 1, 2005
Scheme	6-months	1-year	2-years	5-years	Since inception
Franklin India Bluechip	35.96	47.16	39.89	30.85	31.17
Franklin India Flexi Cap Fund	38.90	--	--	--	41.4
Franklin India Growth Fund	31.64	51.40	39.71	24.22	12.57
Franklin India Opportunity Fund	32.14	53.88	39.40	19.28	8.8
Franklin India Prima Fund	33.17	71.52	57.94	52.99	26.42
Franklin India Prima Plus	31.72	51.46	42.76	33.09	21.46
Templeton India Growth Fund	27.83	42.17	32.76	31.42	19.81
BSE Sensex	32.91	43.63	31.60	17.27	--
Source: www.mutualfundsindia.com

Franklin India Smaller Companies Fund is a 5-year closed-end fund that seeks to provide long term capital appreciation by investing in mid and small cap stocks.

The initial issue is priced at Rs 10 and will close on December 14, 2005. The fund will provide for liquidity every six months. After five years, the fund would automatically become open-ended. The minimum investment amount is Rs 5000.

According to Ravi Mehrotra, president of Franklin India, the 'India growth story' has been gaining wide acceptance on the back of strong economic and corporate fundamentals.

"Smaller companies in particular are expected to benefit from the structural shift being witnessed in the recent years," says he. The fund classifies smaller companies as those with a market capitalization, less than the 100th stock in S&P CNX 500 index.

According to the fund, given the liquidity levels and the stage of business cycle these companies belong to, investors need to take a long-term view to reap the benefits of potential growth.

The closed-end nature of the fund is expected to provide that since the investments will be locked in for five years, which allows the fund manager to take a long term perspective, without getting impacted by asset flows in and out of the fund.

This is especially useful while investing in smaller companies, given the possible volatility in earnings over the short-term and consequently their share prices. The fund will follow a bottom-up approach to stock picking and plans to invest across sectors. The fund can also invest upto 10 per cent of its assets in unlisted stocks.

However, investors do have an option to withdraw investments in part or in full every six months during a pre-determined 7-day period. The fund charges a high exit load.

For any redemption before the first 12 month of allotment, the fund will charge a 4 per cent (of NAV) exit load. The load gets lower as the holding period gets longer. There is no entry load. Investors in the fund will also benefit from zero long-term capital gains tax, like any open-ended equity scheme.

According to the fund, one of the problems faced while investing in mid and small cap companies is the lack of asdequate research. Such companies offer higher growth potential since the potential for discovering quality stocks before the market is high. The small cap segment also offers more choice to the fund manager than the large cap segment.

The fund notes that decision making is quicker in smaller companies and thus the ability to capitalize on opportunities is better.

As a result, well-managed mid and small-sized companies experience higher growth rates than their more established large-sized counterparts.

However, that could prove to be a double edged sword, because such companies often have low liquidity and run the risk of price manipulation. Also corporate governance may be an issue in such companies and the businesses may not be resilient enough to withstand shocks.

However, Franklin Templeton Mutual Fund has proved to be among the best in the business in terms of managing investments in mid and small cap companies.

The mid-cap oriented Franklin Prima fund is among the best performing equity diversified schemes over a period of time. The fund has given a 71.52 per cent over the past year.

Other leading funds like Franklin India Bluechip (47.16 per cent), Franklin India Prima Plus (51.46 per cent) has also turned in an impressive performance over the past year.

Franklin Templeton Mutual Fund is among the largest fund houses in the country in terms of assets under management. As on October 30, 2005, the fund manages assets worth Rs 16513 crore.