Investing in micro and small caps involves a lot of mentoring and nurturing to help small companies scale-up their operations, but can deliver good growth over a longer span of time, according to NAV Capital's Vineet Arora.
"The key is understanding the business model and the promoters. You are infusing them with capital to take to the next level of growth," Arora, managing director and head of asset management at NAV Capital, told NDTV Profit on The Portfolio Manager show.
"We focus on tier-2 cities where you find most SME companies doing well. A good hub for us has been Pune, Ahmedabad and Kolkata," he said.
Arora manages NAV Capital Global Opportunities Fund and NAV Capital Emerging Star Fund. The Dubai-based firm, with Singapore-registered funds, invests largely in micro and small-cap companies. It is one of the largest investors in the SME platform.
Listing the key metrics on the basis of which the fund invests, he said the company has to be profitable consistently, growing faster than the industry despite limited capital, have a small market share, and there has to be background checks on promoters.
The holding period is at least 2-3 years, he said, highlighting that the companies will require time to deploy proceeds from public issue into its business and scale up.
With regards to exit, Arora said the fund calibrates it over a month to not shake up the system, as large exits can quake the SME segment.
The fund's portfolio has an allocation of 60% to micro and small caps, and 20% each to cash and pre-IPO stocks.
Sectorwise, the fund has 19.65% allocation in RAAS (Robotics), 14.18% in household, 10.99% in pharma, 7.12% in infrastructure and 7% in cable and D2H.
Since inception, it has delivered returns of 146.34%, as compared with 27.4% for the Nifty 500 index.
Watch the full conversation here:
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