WhiteOak's small-cap fund of funds aims for a steadier ride

WhiteOak Capital has never launched a small-cap fund. Its first small-cap product, the WhiteOak Capital Diversified Equity Small Cap Active FOF, is a fund of funds that puts at least 95 per cent of its money into other fund houses' small-cap funds. Aashish Somaiyaa, CEO of WhiteOak Capital Mutual Fund, says the market has plenty of small-cap funds. What investors lack is a way to stop chasing last year's winner. The NFO closes on October 12.

Small-cap winners rarely stay on top

Somaiyaa has kept WhiteOak away from volatile bets. When PSU, defence and power were the hot themes of 2022 to 2024, he passed. Small caps get the same caution. By his reckoning, the index drops 20 to 30 per cent almost every other year, and the leading fund keeps changing. “Winners keep rotating,” he says. Investors buy the leader just as it starts to slide, stop the SIP and switch, often into the next fund about to stumble.

The basket mixes styles on purpose

The fund will own four or five of the 36 small-cap funds, by Somaiyaa's count, and they won't be today's winners. He compares the basket to Lego blocks. Each fund has a different style and shines in a different market. A few will always be behind. The basket only needs to rank in the top half each year, and sometimes inside the top quarter. Winners keep changing, he says, so the steady fund comes out ahead.

Numbers such as information ratio and downside capture cut the field to nine or 10. A questionnaire and in-person meetings then test whether each manager's stated approach matches the portfolio.

Exits will be rare

Weak returns alone will not get a fund dropped. A fund that lags when its style should be working will be reviewed and may go. A new fund manager triggers a review, not a sale. Size is no reason to leave. Somaiyaa expects line-up changes every couple of years at most. Fresh inflows will keep each fund near its target weight.

Costs stay in line with a regular fund

The total base expense ratio, including what the underlying funds charge, is capped at 2.1 per cent. WhiteOak's own layer cannot exceed twice the underlying funds' weighted expense ratio. If those funds average 0.55 per cent, the regular plan tops out at 1.65 per cent. Somaiyaa expects the direct plan at about 0.75 to 0.85 per cent. Units redeemed within a year carry a 1 per cent exit load.

Tax is the trade-off. The FoF is taxed as a non-equity fund. Gains turn long-term after two years, not one, at the same 12.5 per cent. Earlier gains are taxed at slab rates. In return, switches inside the basket attract no tax, and the investor's SIP keeps running.

One SIP for the whole small cap allocation

Somaiyaa suggests long-term SIP investors keep half their equity in mid and small caps, with 30 to 35 per cent in small caps. He would put that entire slice into the basket. SIPs start at Rs 100.

His pitch is simple. Choose the category once, and let the basket do the fund-picking.