Why Vikas Khemani’s new small-cap fund plans to turn away money at Rs 5,000 cr

This nudged him to build an investment firm where forensic risk management precedes growth analysis, leading to the creation of Carnelian’s CLEAR investment framework. Khemani thus transitioned from institutional advisory to asset management, directly in investors' interests. He built a long-term, high-conviction investment platform with direct accountability for performance. He named his asset management firm ‘Carnelian’ after the red-orange coloured precious gem associated with prosperity, abundance, and protection, often placed where wealth is kept.

This was done with a mission to place a virtual Carnelian in every client's portfolio, carrying the same timeless promise of growth and protection. To support this, Khemani, a CA, CFA charterholder and qualified CS, invested in people and processes. He brought in Manoj Bahety, also a CA and CFA and an expert in forensic research, fundamental analysis, and stock selection, with decades of institutional research experience; he was formerly Head of Forensic Research at Edelweiss Securities.

Swati, a CA with over two decades of experience, managed corporate finance, operational strategy, and was responsible for scaling the business. Her mentoring laid the foundation for a strong, cohesive, high-performing investment management team. Together, the three established Carnelian as a research-first, process-driven boutique asset management firm, initially offering portfolio management services (PMS) and Alternative Investment Funds (AIFs) strategies for high-net-worth and ultra-high-net-worth individuals.

Track Record: How Carnelian’s PMS and AIF Strategies Have Fared Carnelian Asset Management’s “Capital Compounder Strategy” PMS scheme, which was launched in May 2019 with a multi- and flexi-cap approach with focus on identifying high-quality companies that benefit from India's long-term economic growth, has delivered a 19.0% compounded annualised growth rate (CAGR). Similarly, many of Carnelian’s other schemes launched in later years have delivered impressive double-digit compounded annualised returns since inception (see table below).

AUM is in Rupees in crore.Returns over 1 year are compounded annualised.Data as of 30 September 2026Source: Even Carnelian’s category III Alternative Investment Funds (AIFs), which require a minimum investment of Rs 1 crore, have delivered strong multi-year alpha against their benchmarks. For instance, the Carnelian Capital Compounder Fund 1, the firm's flagship AIF launched in May 2019, has delivered a strong 22.5% CAGR versus the Nifty 500's 12.2% CAGR as of 31 July 2026.

Also, the Carnelian Structural Shift Fund (a long-only small & mid-cap AIF launched in April 2022) has clocked a 23.6% CAGR, compared to the Nifty 500's 10.3% CAGR (as of 31 July 2026). After proving its prowess in PMS and AIF, Khemani-led Carnelian Asset Management expanded into the mutual fund business, officially entering in July 2026, reaching retail and other investors. Carnelian has now launched a new fund offer (NFO), the Carnelian Small Cap Fund, which is currently open for subscription and closes on 30 October 2026.

But before we look at the unique characteristics of the Carnelian Small Cap Fund, it would be meaningful to understand Carnelian’s proprietary CLEAR framework, which is the brainchild of Khemani and his team. The Forensic Filter: Unpacking Carnelian’s Proprietary CLEAR Framework Here is what Khemani and his team look at: Cash Flow – whether the profits of the company have turned into cash Liabilities – whether the company has heavy or any hidden debt Earnings quality – whether profits are real and sustainable Asset quality – is the balance sheet genuinely strong?

Related parties – is the promoter’s conduct clean? To understand these aspects clearly, the research and investment team not only reviews financial reports and filings, but also meets with management, visits plants, and speaks with customers, suppliers, employees—and people who've left the company too. This provides a complete, 360° view of the business. Source: This helps the team assess integrity, modesty, passion, realistic aggression, efficient capital allocation, skin in the game, and strong governance, including how the business manages risks and its environmental and social practices.

This forensic discipline has been part of Indian equity research since 2007 and has only grown since. Risk is the primary pillar, followed by growth Carnelian Asset Management believes in taking risk only when rewards clearly justify it. In risk assessment, what matters most is the chance of permanent capital loss, meaning losing 80-100% of an investment for good. This happens when there is weak or dishonest management and the business is exposed to disruption.

If these risks are avoided, the investment may offer upside. While markets are volatile by nature, Carnelian doesn’t let volatility drive decisions; it prefers to stay patient through volatility, particularly when price swings are driven by political events, global events, and other unpredictable factors. What Carnelian Asset Management believes is that your capital is finite and deserves the best risk-adjusted return it can earn.

Hence, it weighs opportunity cost, which comes from knowledge gaps and the biases we all carry. Growth is the second pillar. When looking for growth (as Carnelian believes in growth investing), it captures moments when earnings growth and a re-rating arrive together. This may be triggered by management change at a fundamentally sound business, or a structural shift the market hasn’t recognised yet.

Carnelian Asset Management also looks for steady compounders, i.e., companies that are already good and growing steadily. So, earnings growth matters most, while re-rating is a bonus, not the plan. Overall, the growth strategy is QGARP: Quality Growth At a Reasonable Price. Simply put, it means buying quality businesses that can keep growing, but only at a price that makes sense. Source: Carnelian Mutual Fund Presentation Putting risk and growth as foundational pillars, Carnelian Asset Management aims to clock superior risk-adjusted returns across market cycles.

Corpus Ceiling: Why Carnelian Is Capping Assets at ₹5,000 Crore Unlike most other small-cap funds in India, the Carnelian Small Cap Fund (an open-ended equity scheme) has announced a Rs 5,000 crore cap, keeping it nimble and focused on alpha rather than assets under management (AUM). The fund house believes a capped corpus will let the fund move in and out of positions without moving the stock and keep focus on alpha over asset gathering.

In other words, the fund house will restrict fresh lump-sum subscriptions, switch-ins, and STPs once the fund's total assets reach Rs 5,000 crore. This is rare in the industry, where many are in a constant race to grow their fund’s AUM. The fund house believes small-cap investing demands discipline. Small caps are volatile, not fragile. Small caps are companies ranked from the 251st company onwards by full market capitalisation.

They can fall sharply in the short run but have shown remarkable wealth-creation potential over the long term. How will the Carnelian Small Cap Fund allocate its assets? Under normal circumstances, the fund will invest 65-100% of total assets in equities and equity-related instruments of small-cap companies, and up to 35% in other than small-cap companies. It may also invest up to 35% in overseas securities.

Asset Allocation Source: Scheme Information Document In addition to equities, the fund may invest up to 10% of total assets in InvITs. It may also invest in gold and silver ETFs, as permitted by the regulator. Moreover, for defensive purposes and liquidity, it may invest up to 35% in money market instruments and other liquid instruments. That said, the scheme's overall investment objective is to generate long-term capital appreciation by investing predominantly in equity and equity-related securities of small-cap companies.

However, there is no assurance that the Scheme will achieve its investment objective. The fund’s performance will be benchmarked against NIFTY SmallCap 250 TRI. What is the investment strategy and portfolio construction approach? Carnelian Mutual Fund intends to approach the portfolio with focused ideas, high conviction, and disciplined execution. From a universe of over 1,000 companies, Carnelian Small Cap Fund would ultimately invest in 30-50 stocks, applying the CLEAR forensic filter, quantitative and qualitative screening, the compounder framework, growth, moat and re-rating triggers, and ultimately fund manager conviction.

The fund managers will endeavour to identify businesses with sustainable competitive advantages, scalable business models, strong management quality, sound corporate governance practices, healthy balance sheets, and long-term earnings growth potential. Overall, QGARP will guide portfolio construction. To reduce risk, the fund will diversify its assets across sectors, industries and issuers, and will continuously monitor portfolio companies and practice prudent liquidity management to mitigate volatility and liquidity risk.

The objective is to have a focused portfolio of high-quality businesses with the potential to create risk-adjusted alpha. Moreover, the fund will be actively managed. The fund will actively rebalance the portfolio in response to changes in business fundamentals, valuations, market conditions, regulatory developments, and liquidity considerations. Who will manage the Carnelian Small Cap Fund? Deepak Malik, Chief Investment Officer (CIO) and Fund Manager, and Viraj Parekh will guide investment decisions and portfolio construction.

Malik, a CFA charterholder, is a seasoned investment professional with more than 25 years of experience across various organisations, primarily in the investment management industry. Should you invest in the Carnelian Small Cap Fund? Small-cap funds have generated phenomenal wealth for investors over the last couple of years, but the risk is very high. They sit at the very high end of the risk-return spectrum, just a notch below sector & thematic funds.

You need a very high-risk appetite to invest in small-caps, and you shouldn't get carried away by historical returns, which are no indicator of future returns. Valuation Headwinds: Navigating Small Caps at 33.7x P/E At present, after a sharp rally in smallcaps from the March 2026 bottom, the PE of the Nifty 250 Small Cap Index is once again trading beyond the 5-year median. In other words, small caps aren’t cheap, and amid the present geopolitical tensions, oil on the boil, inflation, cost pressures, and intense volatility, among other factors, they are vulnerable to downside risk.

PE of the Nifty SmallCap 250 Index Data as of 16 October 2026Source: www.screener.in When approaching small caps, you need to have not only a high-risk appetite but also a time horizon of 7-10 years or more. The launch of the Carnelian Small Cap Fund comes amid challenging times, and its performance in such conditions remains to be seen over a period of time. While Khemani’s Carnelian Asset Management has proven its mettle in managing its PMS schemes and AIFs, and follows sound investment processes & systems, it would be prudent to evaluate the Carnelian Small Cap Fund's performance relative to its peers over time before making an investment decision.

Invest sensibly; be a thoughtful investor. Note: We have relied on data from www.pmsaifworld.com, www.carnelianmf.com, and the scheme information document throughout this article. Only in cases where the data was not available have we used an alternate but widely used and accepted source of information. Portfolio data and returns data are as of 30 September 2026. Disclaimer The above content is for informational purposes only.

Mutual Fund investments are subject to market risks. Past returns are not indicative of future returns. Please consult your financial advisor before investing. Rounaq Neroy has over 20 years of experience in the financial markets and investments. He is a close observer of the Indian economy and writes deeply on the capital markets, mutual funds, stocks, precious metals, asset allocation, wealth management, and investment strategy.

His editorials provide interesting, actionable investment ideas to guide readers in the journey of wealth creation and make wise decisions. Rounaq was the Head of Content at PersonalFN (Quantum Information Services Pvt. Ltd.), which also owns Equitymaster.com – India’s oldest and trusted equity research house.