For the uninitiated, Franklin India Smaller Companies Fund (FISCF) might seem like yet another addition to the ever-burgeoning list of mid cap funds. However what separates FISCF from the rest is its close-ended nature. The combination of a close-ended fund investing in mid/small cap stocks makes FISCF an interesting investment proposition.
Small/mid sized companies are likely to be under-researched thereby providing an investment opportunity that is yet to be identified by the market. Often such companies offer higher growth potential and therefore an opportunity to benefit from higher than average returns in the long-term.
On the flipside, since small/mid sized companies are often under researched, there is a fair chance that some 'reasons not to buy' might be overlooked while making an investment decision. The chance of manipulation or fraud in such companies is higher as risk control measures and corporate governance tend to be neglected.
Similarly, the stocks could remain illiquid even at the end of the investment horizon which can be an unviable proposition for the fund manager.
It is this unique nature of small/mid sized companies which makes mid cap funds high risk - high return investment propositions. Investors with a commensurate risk appetite can consider adding FISCF to their portfolios.
From an asset allocation perspective, investors should consider allocating that part of their equity portfolio which has been reserved for long-term (considering the fund's close-ended nature) investments. Also investors would do well to appreciate that while a fund like FISCF can provide much-needed impetus to their portfolios, conventional diversified equity funds (like HDFC Top 200 and Sundaram Growth among others) should form the core of their portfolios.
A Personalfn consultant can help you decide what is the right asset allocation for you.