Carnelian brings its forensic filter to the Rs 500 SIP

Vikas Khemani’s case for the Carnelian Small Cap Fund rests on one idea. In small caps, you protect your returns first by keeping out the companies that can destroy capital. Then you buy businesses that can grow earnings at 20 per cent a year, and treat any re-rating as a bonus.

Carnelian has managed money for wealthy families and family offices since 2019. Khemani, its founder, told me the firm had to complete five years before it could even apply for a mutual fund licence. It applied the moment it qualified. The aim now is to give a Rs 500 SIP the research its large clients get.

Small caps are where new sectors are born

Every phase of India’s growth, Khemani argues, throws up new sectors, and they all start small. Private banks after 1992. Then insurers, NBFCs and brokers. IT and generic pharma companies once worth under Rs 1,000 crore are now worth lakhs of crores. Small caps are also where an investor needs a professional most, he said, because at that size nobody has yet proved who can scale up.

Small caps trade near 35 times earnings, and he makes no promise for the first two years. His view is that markets are reasonably placed. In two or three years, he expects this to look like a good time to have bought.

Half the companies fail the first screen

About 1,000 companies enter Carnelian’s funnel and roughly half fall out early. Out go businesses that tie up a lot of working capital, use a lot of capital without earning a good return on it, or sell on thin gross margins. Cash flow is the next test. A company with no free cash in ten years and little growth is a poor business. One that grew ten-fold has used its cash well.

Then come the people. “Kabiliyat, niyat aur mehnat,” Khemani said: competence, integrity and drive. Carnelian checks with ex-employees, suppliers and distributors. The hardest calls sit in a grey zone, where a promoter who cut corners early cleans up with scale. Both the mistakes and the multi-baggers come from there.

The cap follows one rule

The fund stops taking lump sums at Rs 5,000 crore. That is the low end of the Rs 5,000 to Rs 10,000 crore range distributors suggested. At that size, a holding is 0.25 to 1 per cent of a Rs 10,000 to Rs 30,000 crore company, so buying and selling stays manageable. Khemani called the number a guide, not a law. The fund will close the day its size starts to hurt returns, and the AMC board makes that call.

A stock leaves for one of four reasons: the thesis was wrong, the thesis changed, it played out, or a better idea arrived. The fund will not hold cash to time the market. The room to buy gold and silver ETFs is an enabling clause, not a plan.

Khemani does not pick the stocks. He sits on the AMC board and debates ideas with the team. Fund managers Deepak Malik and Viraj Parekh make the trades through a dealing desk separate from the PMS business.

To investors who already own a small-cap fund, he offers one reason to add another. Founder-run firms have their reputations on the line. “Everything is at stake for us.”

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