“The one area of the entire financial markets where

the individual investor can actually have an edge on

the institutional investor is small-cap stocks. ”
- The Small-Cap Investor

Why Small-Caps?
Small-Caps outperform in long term

Small-Cap outperformance is a global phenomena

India Small-Cap out-performance US Small-Cap out-performance

over Large-Cap since 2003 over Large-Cap since 2000
2,600 600

2,100 500
4.5x
400
1,600 16.5x
300
1,100
11.3x 200 2.5x

600 100

100 0

Dec-01

Dec-06

Dec-11
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18

Dec-00

Dec-02
Dec-03
Dec-04
Dec-05

Dec-07
Dec-08
Dec-09
Dec-10

Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
S&P BSE SENSEX S&P BSE Small-Cap MSCI USA Small cap TRI MSCI USA Largecap TRI

3
Data source: Bloomberg Data till Dec 2018. Index rebased to 100. Past performance may not be sustained in the future.
Fundamentals drive small-cap outperformance

Motherson Sumi IndusInd Bank

250 Marketcap
6 2,000 Marketcap 70
1,800 98,709 cr.
54,517 cr.
EPS Growth 29% cagr 5 EPS Growth 39% cagr 60
200 1,600

Earnings per share

Earnings per share

Stock price 48% cagr 1,400 Stock price 65% cagr 50
4

Share Price
Stock Price

150 1,200 40
3 1,000
100 800 30
2
Marketcap
600 20
Marketcap
50 2,406 cr. 1 400 1,139 cr.
10
200
0 0 0 0

motherson sumi Trailing 12M Earnings per Share indusind Bank Trailing 12M Earnings per Share

Stock price are slaves of earnings

Quality small-caps have shown strong earnings growth compared to their large-cap counterparts
This leads to outperformance of small-caps over large-caps in the long run
4
Data source: Bloomberg Data till Dec 2018. Past performance may not be sustained in future. Only for illustration purpose only. The scheme may or may not invest in these stocks.
Bigger opportunity for alpha in small-caps

Small-Caps are hardly covered by analysts

No. of Analysts Covering Stocks from BSE Smallcap Index

Average number of analysts covering large- 450
caps is 30 and mid-caps is 15. Small-caps are 400
relatively under-researched. 350

Number of stocks
Out of 870 stocks in BSE Small-cap Index 300
210 stocks are not covered by any analyst 250
398 stocks are covered by less than 5 200
analysts 150
This gives fund manager an edge in spotting 100
good businesses early and generate higher 50
alpha 0
None <5 < 10 < 20 < 30 > 30
Number of analysts
5
Data source: Bloomberg. S&P BSE Small-cap Index considered for this analysis. Data as on Dec-18
Demand may increase in small-caps

Stock categorisation can lead to higher demand for small cap stocks

Post SEBI scheme categorization investible MF Category wise AUM

universe has shrunk in large cap and midcap 200000

segment 180000

Only 100 stocks available in large-caps 160000

35%

Only 150 Stocks available in Mid-caps 140000

% of AUM that can be invested in

AUM in Rs. Crore

Over 2,500 stocks available in small-caps 120000
small caps as per revised mandate
20%
Since the small-cap universe is large, fund 100000

managers may incrementally look forward to 80000

invest in this space 60000 35%

As shown in the graph, potentially over Rs. 1 40000 30%

lakh crore can find its way into small-cap 20000

stocks 0
LargeCap Large&Midcap MidCap Multicap
6
MF AUM as on 30th Nov 2018. Data source – ACE MF.
Growth stories unique to small-caps
Industrial/Infra Sector
Industrial/infra sector shall do well
over medium term as it is levered
to acceleration in economic
growth.
In this sector, small-cap stocks
account for 69% of companies and
27% of market cap.
Mid-cap stocks account for another
23% of companies accounting for
32% of market cap.
Data source: Bloomberg
Chemical Companies
Indian chemical companies are
expected to do well over medium
to long term.
These companies continue to gain
market share from China in select
product categories.
83% of listed chemical companies
are small-caps accounting for 50%
of market cap.
Staffing Companies
Staffing services companies are
growing fast and shall continue to
do well in medium to long term.
There is no large cap company in
this sector.
Two thirds of the companies (both
in terms of numbers and market
cap) are small-caps.
7
“Start with acorns, wind up with oak trees. Start with oak
trees, and you wont have quite the same dramatic growth.
”
That’s small cap investing.
- 100 baggers: Small Cap Investing

Why invest in Small-Caps?

Investing during tough times has proved rewarding

Last 1 Year Return Subsequent 5 Year Average

(Small Cap index) Return (Absolute)

From -30% to -20% 90%

Investing in small-caps has been rewarding
when last one year returns are negative
From -20% to -10% 102% As on today Small-Cap Index is down over
From -10% to 0% 92%
28% in last one year
Hence, considering past trends, we believe
From 0 to 10% 74% this may be a good time to start investing in
From 10% to 20% 38% small-caps

From 20% to 30% 32%

9
Data source: Bloomberg Data till 17th Dec 2018. Past performance may not sustain in the future. Rolling return analysis done using nifty smallcap 100 index since Jan 2004.
Quality stocks available at good prices

Small-Cap stocks have fallen sharply from their peak

Fall from peak % Stocks

Less than 10% 4 25% small-cap stocks have fallen more than 50%
53% small-cap stocks have fallen more than 30%
10% to 20% 2
from their peak
20% to 30% 16 This provides good opportunity for investing in
quality small-cap stocks
30% to 50% 53

More than 50% 25

10
NSE small cap 250 index used for the above analysis. Data as on Dec-18. Data source: Bloomberg
History is in favour of small-caps

Calendar Out Performance

Large-cap Small-cap
Year (small-cap Vs Large-cap)
2006 47 46 -1
2007 47 95 48 In past, small-caps have bounced back
2008 -52 -69 -17 sharply after underperforming large-caps in
2009 81 114 33
the previous year.
2010 17 16 -1
2011 -25 -36 -11
The recent underperformance by small-caps
2012 26 38 12 is most severe in the last 12 years.
2013 9 -8 -17 This indicates that it may be a good time to
2014 30 70 40 start investing in small-caps.
2015 -5 10 15
2016 2 0 -2
2017 28 57 29
2018 3 -32 -35
11
Largecap is represented by Sensex, Smallcap is represented by Nifty smallcap 250 index. Data source: Bloomberg. Past performance may not be sustained in the future. Data for 2018 till Dec 2018.
Better risk-reward in quality small-cap stocks

A small-cap Industrial company

Valuations looking Valuations have

Better Risk - Reward scenario
expensive turned attractive

1 Year ago Now 1 Year ahead

Stock Price Down 25% Valuation Scenario P/E Price Change*

No change in PE 13.1 20.4%

P/E 22.4 P/E 13.1
Marginal increase in PE 17.8 63.1%
ROE 10.2 ROE 16.9
Back to year ago PE level 22.4 105.8%
P/B 2.3 P/B 2.2
Further derating in PE 10.4 -4.5%

Last 1 year EPS growth 29% Better upside potential with limited downside
*Assuming EPS growth of 20.4% and ROE 18.1% Price change is calculated by
12
Data source: Bloomberg. Only for illustration. Past performance may not be sustained in the future.
multiplying change in PE and EPS growth.
Better risk-reward in quality small-cap stocks

A small-cap real estate company

Valuations looking Valuations have

Better Risk - Reward scenario
expensive turned attractive

1 Year ago Now 1 Year ahead

Stock Price Down 26% Valuation Scenario P/E Price Change*

No change in PE 14.7 7.8%

P/E 23.1 P/E 14.7
Marginal increase in PE 18.9 39.0%
ROE 7.9 ROE 9.9
Back to year ago PE level 23.1 70.3%
P/B 1.8 P/B 1.4
Further derating in PE 12.0 -12.0%

Last 1 year EPS growth 16.9% Better upside potential with limited downside
*Assuming EPS growth of 7.8% and ROE 10.1%. Price change is calculated by 13
Data source: Bloomberg. Only for illustration. Past performance may not be sustained in the future multiplying change in PE and EPS growth.
Better risk-reward in quality small-cap stocks

A small-cap NBFC

Valuations looking Valuations have

Better Risk - Reward scenario
expensive turned attractive

1 Year ago Now 1 Year ahead

Stock Price Down 25% Valuation Scenario P/E Price Change*

No change in PE 13.5 48.5%

P/E 32.7 P/E 13.5
Marginal increase in PE 23.1 154.8%
ROE 5.5% ROE 10.7%
Back to year ago PE level 32.7 261.2%
P/B 1.8 P/B 1.4
Further derating in PE 9.5 4.8%

Last 1 year EPS growth 82% Better upside potential with limited downside
*Assuming EPS growth of 48.5% and ROE 14%. Price change is calculated by 14
Data source: Bloomberg. Only for illustration. Past performance may not be sustained in the future multiplying change in PE and EPS growth.
 Monthly returns in %

-50
-40
-30
-20
-10
0
10
20
30
40
50
Feb-04
May-04

Data source: Bloomberg

Aug-04
Nov-04
Feb-05
May-05
Aug-05
Nov-05
Feb-06
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
Small-Caps are volatile

May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Feb-11
Small-caps are even more volatile during bear cycle

May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nifty Small Cap 100 month on month absolute returns

Nov-13
Hence, it is prudent to invest in a staggered way and reduce timing risk

Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Bear cycles in small caps

Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
Feb-17
May-17
Aug-17
Nov-17
Feb-18
May-18
Aug-18
Nov-18
16
Small-Caps in small STePs

Small-caps
have corrected Small-cap index has corrected by over 35% from its peak

..but predicting While small-cap stocks may have started looking attractive, no one can
bottom is difficult predict the bottom as sentiments can drive down prices further

Volatility may Key macro factors like crude price, interest rates and elections can
continue.. drive prices either way in next six months

Invest in Edelweiss Small-cap Fund in a staggered way through STeP facility

to reduce timing risk 17
Data source: Bloomberg. Data for Nifty smallcap 250 index as on Dec 2018.
Edelweiss Small cap Fund + STeP facility
“It’s better to take many small steps in the
right direction than to make great leap
forward only to stumble backward. ” Plan
Trigger
enabled
Through STeP facility
Smart investors can spread their
investment in Edelweiss
Small Cap Fund in 5 equal
monthly instalments
Remaining 80% will be
invested in Edelweiss
Liquid Fund and will switch
to Edelweiss Small Cap
Fund in 4 equal monthly
instalments on market dips
Under this facility 20% of
the application money will
be invested upfront in
Edelweiss Small Cap Fund
18
Illustration of STeP facility

19
Please read detail terms and conditions for STeP facility on slide number 32
Investment options in Edelweiss Small Cap Fund

NFO Application

Lumpsum Investment Long Term SIP

One time purchase STeP Facility

20% purchase into Small cap Fund NFO Invest 80% in four equal monthly instalments
20
About Edelweiss Small Cap Fund

Investment Strategy Asset Allocation

Invests in small-cap companies that are

Compounding stories with reasonable Small 65% to 100% into Equity and
growth prospects Equity related securities of
caps Small-Cap companies
High quality businesses with strong return
ratios
Operating in niche environment
Other 0% to 35% into Equity and
Equity related securities of
Equities other companies
Eye on quality - higher degree of due diligence

Aim to benefit from both sources of return

Fixed 0% to 35% into debt and
Compounding of earnings
Income money market instruments
Valuation re-rating
21
Unique Portfolio Allocation Strategy

Portfolio is defined under 4 different buckets to ensure consistency in performance

Strategic Allocation (Core Portfolio) Tactical

• Buy and hold approach • Business in cyclical industry
• Compounding Businesses • Well Levered to the upturn
• Proven track record over long period • Bought and sold depending on the phase
• Structural growth story with a high quality of the cycle and valuations
business & management

Option Defensive
• Business offering potentially Large • It is a position that is more of a defensive
scale-up opportunity posture
• Typically has a higher degree of risk • Protecting from any probable market
• Have a 1 or 0 kind of a payoff underperformance

22
Risk Mitigants

Liquidity : Diversification : Quality :

Eye on liquidity of the Well diversified portfolio to Stringent due diligence
underlying portfolio mitigate concentration and eye on quality
to reduce impact and liquidity risk of management and earnings
cost of investing

“Risk comes from not knowing what you’re doing.” – Warren Buffet 23
Who should invest?

Patience : Risk Appetite : Asset Allocation :

Investors who want to Investors who have Investors who are looking
invest for 5 yearslong term higher risk appetite and to invest in small-caps
and can be patient want aggressive as a part of asset allocation
during volatile markets portfolio allocation

“Investing is the intersection of economics and psychology.” – Seth Klarman 24

Process oriented investment approach

Selectivity, scrutiny, Understanding Earnings progression | Valuation changes

high conviction sources of returns | Dividend
Focused
portfolios Independent
Stock position
Expected return

Resizing
Probabilistic Classification:
the bets Sizing the approach Strategic | Tactical | Defensive | Option

Incorporating
bets
new information Scoring:
& stock ideas Risk Business | Management | Growth |
assessment Valuations | Circumstances

Focus on total sectoral active Liquidity

exposure & diversification
25
In-depth research using multiple factors

26
Experienced Fund Manager

Harshad Patwardhan - CIO, Equities

An IIT/IIM, CFA charter with 25 years of industry experience.

12 years experience on the sell side with various MNC brokerage firms and
has been a rated research analyst by several large & prominent FIIs.

He believes that the first-hand experience of covering stocks/sectors and

interacting with experienced fund managers has been extremely valuable for
his investment management career.

Harshad was the CIO Equities at JPMorgan Asset Management for over a
decade and continued as the CIO Equities of Edelweiss Asset Management
after the schemes changed hands in the year 2016.

27
Fund Manager performance

Edelweiss Midcap Fund – 10 year performance Some successful stock picks in Edelweiss Midcap fund

100
Edelweiss Midcap Fund Nifty Midcap 100 - TRI 5 Year Return Growth in
90 Stock
80
(Abs) multiples
70 Fund 21.8% cagr
Action Construction 582% 6.82X
60 BM 18.4% cagr
50 Whirlpool of India 535% 6.35X
40 Solar Industries 483% 5.83X
30
20 Gruh Finance 404% 5.04X
10
Havells India 324% 4.24X
0
Sadbhav Engineering 129% 2.29X

Only for illustration purpose. These stocks were/are actual holdings in Edelweiss Midcap Fund which has been managed by Harshad Patwardhan since the inception of the fund. Performance as on 20th Dec 2018. Past performance
may not be sustained in the future. 28
Fund Manager performance

Benchmark Additional Benchmark

Scheme
Nifty Midcap 100 TR Index Nifty 50 TR Index
Value of Rs. 10000 Value of Rs. 10000 Value of Rs. 10000
Period Returns* Returns* Returns*
Invested Invested Invested
1 Year -12.34% 8,766 -11.17% 8,883 7.82% 10,782
3 Year 9.16% 13,012 11.00% 13,679 12.54% 14,260
5 Year 22.61% 27,742 19.24% 24,132 13.37% 18,742
Since Inception 8.83% 25,231 7.81% 22,754 6.74% 20,408
Past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments.
* CAGR Return.
- Different plans shall have different expense structure. The performance details provided herein are of Regular Plan of Edelweiss Mid Cap Fund. Returns are for Growth Option
only. Since Inception returns are calculated on Rs. 10/- invested at inception of the scheme. In case the start/end date is non business day, the NAV of previous day is used for
computation.
- The scheme is currently managed by Harshad Patwardhan (managing this fund from June 14, 2007).
Data Source: Ace MF, Data as on 30th Nov 2018 In case the start/end date is non business day, the NAV of previous day is used for computation. Please click on
http://edelweissmf.com/Download/factsheet.aspx for performance of other funds managed by fund manager.

29
Fund Features
Fund Structure An open ended scheme predominantly investing in small cap stocks

NFO Period 18th Jan 2019 to 1st Feb 2019

Scheme Re-opens for continuous sale and repurchase on or before February 14, 2019
Exit Load If the Units are redeemed / switched out on or before 365 days from the date of
allotment – 1.00%
If the Units are redeemed / switched out after 365 days from the date of allotment – Nil
MICR Cheques Till end of business hours on Feb 1, 2019

RTGS and Transfer Cheques Till end of business hours on Feb 1, 2019

Switches Switches from equity schemes and other schemes – Feb1, 2019; Till cut off time
(specified for switch outs in the source scheme)
Plans and Options Direct and Regular Plan with Growth and Dividend Payout & Sweep

Minimum Application Amount Rs.5,000/- (plus in multiple of Re. 1)

Fund Manager Harshad Patwardhan

Benchmark Nifty Small cap 250 TR Index 30

“When investors in general are too risk-tolerant, security prices can
embody more risk than they do return. When investors are too risk-
adverse, prices can offer more return than risk ”
- Howard Marks

Many investors today have become risk-adverse in small caps!

Terms & Conditions for STeP facility

Smart Trigger enabled Plan (‘STeP’) is a unique feature that enables investors to invest in the Edelweiss Small Cap Fund (“the
Scheme”) in a staggered manner. You can opt for this facility only during the New Fund Offer (NFO) Period.Minimum Investment
amount under the STeP facility is Rs. 25000/-. Investment for an amount of less than Rs. 25000/- will not be eligible for the STeP
facility and will be considered under the Lump Sum purchase option. Through STeP Facility investors can spread their investments
equally over 5 monthly instalments, wherein the initial 20% of the investment amount will be considered upfront in the NFO of
the Scheme and the remaining 80% will be invested under Edelweiss Liquid Fund - Growth Option as per the NAV applicable on
the date of allotment of Edelweiss Small Cap Fund. Post the closure of the NFO of the Scheme, the amount invested under
Edelweiss Liquid Fund shall be switched into Edelweiss Small Cap Fund in 4 equal monthly instalments which will be triggered on
the basis of 3% fall in the Nifty Small Cap 250 Index on a monthly basis which will be calculated based on the value of the index
on the date of initial allotment. Please refer to the illustration table below for more information. In case the above trigger does
not occur in a month, 20% of the amount invested during the NFO period will be switched to Edelweiss Small Cap Fund on the
last business day of the month. Only one Switch will be triggered in a month. In case of the last instalment under the STeP facility,
the entire balance units available in Edelweiss Liquid Fund will be switched in line with points 4 & 5 above. Units will be allotted
in Edelweiss Small Cap Fund at the applicable NAV prevalent on the date of Switch. A new folio will be opened for all investments
received under the STeP Facility. In case of redemption of units under Edelweiss Liquid Fund during the tenure of the STeP facility,
the amount / number of instalments to be switched would stand reduced to the extent of the amount redeemed or in case of full
redemption, the facility will be discontinued.
32
Disclaimer

Mutual fund investments are subject to markets risks, read all scheme related documents carefully
Disclaimer: This document has been prepared by Edelweiss Asset Management Limited (Edelweiss AMC) based on internal data, publicly available information and other sources
believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this
document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment
objectives, financial situation and the particular needs of any specific person who may receive this document. Sector(s) / Stock(s) / Issuer(s) mentioned above are for the purpose of
explanation and should not be construed as recommendation. The fund manager(s) may or may not choose to hold the stock mentioned, from time to time. Investors are requested
to consult their financial, tax and other advisors before taking any investment decision(s). The information/ data herein alone are not sufficient and should not be used for the
development or implementation of an investment strategy. The same should not be construed as investment advice to any party. The statements contained herein are based on our
current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in
such statements. Neither Edelweiss Asset Management Limited (Edelweiss AMC) and Edelweiss Mutual Fund (the Fund) nor any person connected with them, accepts any liability
arising from the use of this document. Edelweiss Mutual Fund/AMC is not guaranteeing returns on investments made in this scheme. The recipient(s) before acting on any
information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the 33
basis of information contained herein. Past performance may not be sustained in the future.