As an erstwhile visiting faculty and guest faculty now at B-schools, it has been my privilege to have taught thousands of students. Today, we have an ‘Emerging HNI’ category in our business that comprises many of my ex-students, who are now finance professionals in their own right.
I find that many of them are quite fascinated by small-cap stocks and funds. While I do highlight the inherent higher risk that a small-cap stock or fund carries, I also agree that they are at the life-cycle stage where they could consider it judiciously to bolster their portfolio returns.
As per the definition of a small-cap fund recently revised by SEBI, it is one that needs to have at least a 65 per cent exposure to small-cap stocks. In terms of market capitalisation, it comprises those stocks that rank 251st and the ones thereafter. Ironically, this makes it the biggest category in terms of a canvas for a fund manager to select stocks from.
Among the funds we hold in this category are HDFC Small Cap and Reliance Small Cap. Both are extremely aggressive funds that maximise returns when the going is good, as is evident from a glance at their higher, double-digit, three-and-five-year CAGR record. The former has, in fact, contained the downside too relatively better than the rest of the pack during the recent carnage in the market, which affected this category most of all.
Similarly, though L&T Emerging Businesses has slipped during the recent carnage, it is another from this category that we have backed. It has a well-experienced fund manager at its helm, and we expect it to bounce back once the tide turns.
A relative non-performer in this category is ICICI Prudential Small Cap, and though its longer term past record cannot be a barometer of its performance as it is a converted fund, its near-term performances suggest that, as a new convert, it will take time to find its bearings in this category. Don’t write it off just as yet, though.
An important point worth noting here is that unless one has a definite time horizon of more than five years, it makes better sense to participate in this category only via the SIP or STP route.
Finally, just to address the myth that small-cap means unknown risky companies, it is worth noting that the small-cap universe has over a dozen MNCs with names like Bata, BASF, Blue Dart and ICRA, as well as 34 Indian MNCs, including Cox & Kings, Tata Elxsi and Thomas Cook. These companies are amongst the leaders in their industry, providing above-average growth opportunities.
And does small-cap means very small companies? Well, the small cap universe has around 50 companies with an average market capitalisation of more than Rs 7,000 crore, and over 100 companies with market cap of more than Rs 5,000 crore.
Clearly then, for a young investor, there is a case to consider small-cap funds to bolster their long-term returns. Of course, they need to be prepared to take some pain, too, intermittently, as equity returns rarely tend to be linear.
Ashok Kumar
Heads LKW-INDIA, a wealth management firm, and blogs at www.cricinvest.blogspot.com