In the month of March this year, the Indian equity market in general, and Small Cap stocks in particular, appeared headed for a complete rout. As we approach the end of the calendar year, the markets have recovered handsomely and so have many Small Cap stocks. In the Mutual Fund space, Small-Cap Funds, as the name suggests, invest a major portion of their investible corpus into equity or equity-related instruments of small-cap companies.
The Securities and Exchange Board of India (SEBI) defines small-cap companies as those ranked below the 250th place in terms of market capitalisation. According to SEBI, small-cap schemes need to invest at least 65 per cent of their total assets in such firms. It is important for investors to be cognizant of the fact that small-cap funds carry a high level of risk. Even the slightest volatility in the market can have a huge impact on the share prices of small-cap companies.
Let us now turn the spotlight on a few Small Cap funds with a track record of at least 8 years and an AUM in excess of Rs 5,000 crore. DSP Small Cap Fund was launched in June 2007 and has an AUM of Rs 5,791 crore. Its 3-year CAGR has been around 1.6 per cent while its 1-year return has been around 34 per cent. This fund invests largely in stocks from the chemicals, healthcare, and automobiles segment. HDFC Small Cap Fund has an AUM of Rs 9,323 crore and was launched in April 2008.
Its 3-year CAGR has been around 0.5 per cent while its 1-year return has been around 15 per cent. This fund invests largely in stocks from sectors like services, chemicals, and healthcare. SBI Small Cap fund was launched in September 2009 and has an AUM of Rs 6,202 crore. The 3-year CAGR for this fund has been around 6 per cent while its 1-year return has been around 27.5 per cent respectively.
This fund invests in stocks across sectors like engineering, construction, and FMCG. Nippon India Small Cap Fund has an AUM of Rs 10,398 crore and was launched in September 2010. Its 3-year CAGR is around 2.5 per cent while its 1-year return is around 26 per cent. This fund has higher allocations in stocks across sectors such as chemicals and engineering.
When one studies the year-wise performance of these and most other Small Cap Funds available it becomes evident that investors hoping for a linear or steady performance are bound to be disappointed. Historical evidence indicates that the trick here lies in steadily investing in these funds, preferably via the SIP route and awaiting at least two uptick years before realizing rewards offered for one’s patience. Hence, one must opt for small-cap funds only if one has a higher-than-normal risk tolerance, as well as the ability to play the waiting game.
Ashok Kumar
heads LKW-India. He can be reached at ceolotus@hotmail.com