After outperforming large-cap stocks for over a year now, small-cap stocks remained under pressure in the last couple of weeks. The Nifty Smallcap 100 index declined 4.5% in the last one month even as large-cap indices continued to soar higher.

Notably, valuations across market caps have turned expensive. However, this may not mean the end of the ongoing broad-based market rally. Going ahead if the corporate earnings remain robust and economic recovery is on track, it could once again fuel a rally in small-cap stocks.

That said, it is important to be cautious because the volatility could intensify in the near term. Therefore, prefer only well-managed schemes in the small-cap funds category and invest with a long term view of more than 5 years. Avoid investing in small-cap funds that chase returns instead of focusing on quality stocks and risk management.

SBI Small Cap Fund is a well-managed small-cap fund known for picking high conviction multibagger stocks.

Graph 1: Growth of Rs 10,000 if invested in SBI Small Cap Fund 5 years ago

Data as on August 24, 2021
(Source: ACE MF) 

SBI Small Cap Fund has shown superior performance across market phases and cycles in the past. It has managed to significantly outperform the benchmark and the category average during bull and bear market phases. Over the last 5-year period, SBI Small Cap Fund has been the top performing scheme in its category and has rewarded investors with a CAGR of around 22.2%, as against 16.6% CAGR delivered by its benchmark S&P BSE Small-Cap – TRI. SBI Small Cap Fund’s extraordinary return has attracted many investors. Its AUM has grown over four times in the last 2 years. Due to the size constraints in managing a small-cap fund as well as the limited opportunities in the small-cap space, this fund has discontinued lump sum investment from September 2020. Additionally, it has restricted fresh registration through SIP at Rs 25,000 per month. While SBI Small Cap Fund is prone to high risk, it still has the ability to compensate investors with superior returns and reward them for their patience over the long term.

Table: SBI Small Cap Fund’s performance vis-á-vis category peers

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
Quant Small Cap Fund	1,053	104.70	81.99	32.34	20.64	17.59	32.82	0.28
Axis Small Cap Fund	6,785	66.30	40.90	26.81	21.38	20.56	22.99	0.30
Kotak Small Cap Fund	5,349	91.21	54.42	26.68	20.64	21.39	27.86	0.26
ICICI Pru Smallcap Fund	3,002	77.73	42.98	21.88	16.50	15.01	29.12	0.22
Nippon India Small Cap Fund	16,613	78.98	48.82	20.39	22.16	21.73	28.70	0.21
Union Small Cap Fund	560	68.66	49.36	20.14	15.77	14.95	26.56	0.21
SBI Small Cap Fund	9,620	57.39	40.22	19.73	22.20	24.38	24.47	0.21
DSP Small Cap Fund	8,266	64.75	44.33	19.01	14.97	19.40	27.41	0.20
HDFC Small Cap Fund	13,275	76.99	36.89	15.64	18.92	18.55	27.84	0.17
Sundaram Small Cap Fund	1,534	72.63	40.51	15.09	12.22	14.64	29.79	0.15
S&P BSE Small-Cap – TRI		75.01	46.77	16.32	16.56	15.03	29.31	0.16

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on August 24, 2021
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

SBI Small Cap Fund has consistently registered above-average returns and outpaced its benchmark. Even though SBI Small Cap Fund has trailed the benchmark and many of its peers in the last 1-year and 2-year period, it is well capable of showing a quick bounce back. SBI Small Cap Fund stands among the top quartile performer over longer time periods of 5 years and 7 years. During this period, it has outperformed its benchmark S&P BSE Small-Cap – TRI by a noticeable margin of around 5.5 to 9 percentage points.

This outperformance has come at a relatively reasonable risk. The fund’s Standard Deviation (24.5%, annualised) is lower than that of its benchmark (29.3%, annualised) as well as most of its category peers. Its risk-adjusted returns (as denoted by the Sharpe ratio) is amongst the highest in the small-cap funds category and clearly outpaces the benchmark index.

Investment strategy of SBI Small Cap Fund

SBI Small Cap Fund aims to provide investors with opportunities for long-term growth in capital along with the liquidity of an open-ended scheme by investing predominantly in a well-diversified basket of equity stocks of small-cap companies. The fund is mandated to hold minimum 65% of its investment in equity & equity related instruments of small-cap companies (companies ranking 251st onwards in terms of full market capitalization, as defined by SEBI).

Apart from small-cap stocks, SBI Small Cap Fund holds a significant exposure of about 15% to 25% in mid-caps along with a minor allocation of up to 2% in large-caps.

SBI Small Cap Fund strategically follows a blend of growth and value style of investing. The fund manager looks to invest in high growth-oriented multi-bagger stocks of small-sized companies, but is cautious about the price he is willing to pay for the stock. He also hunts for temporarily beaten down stocks available at cheap valuation and does not resist from taking few short-term calls. The fund manager follows the bottom-up approach to stock-picking and is selective while choosing companies within the small-cap space.

Graph 2: Top portfolio holdings in SBI Small Cap Fund

Holding in (%) as on July 31, 2021
(Source: ACE MF) 

SBI Small Cap Fund usually holds a fairly diversified portfolio of about 45 to 50 stocks. The fund has limited allocation in each stock to under 5%. As on July 31, 2021, the fund held 51 stocks in its portfolio reasonably diversified across sectors. The top 10 holdings accounted for about 32.5% of the portfolio. Among its top holdings, the fund held exposure to Elgi Equipments (3.9%), Carborandum Universal (3.7%), JK Cement (3.4%), Sheela Foam (3.7%), and V-Guard Industries (3.3%) together accounting for around 17.6% of its assets.

SBI Small Cap Fund has benefited immensely from its holdings in Elgi Equipments, Carborandum Universal, JK Cement, Rajratan Global Wire, Navin Flourine International that have turned out to be multibaggers in the fund’s portfolio. Stocks like Hatsun Agro Products, Grindwell Norton, Relaxo Footwears, Lemon Tree Hotels, CSB Bank, among others have been the other top portfolio gainers.

The fund’s portfolio is skewed towards Engineering where it has allocated 25.6% of its assets. Chemicals, Consumer Durables, Consumption, Construction, Cement, Auto ancillaries, Hotels, Banks, Power, and, Retail are among the other prominent sectors in SBI Small Cap Fund’s portfolio. The fund’s portfolio is spread across cyclical, sensitive, as well as defensive sectors.

Suitability

Since its inception, SBI Small Cap Fund has been one of the well-managed schemes in the small-cap funds category. It has a proven track record of timely identifying fundamentally sound stocks in the small-cap space that have turned into multi-baggers and have helped the fund regain its spot among top category performers.

Being a small-cap biased fund, SBI Small Cap Fund is bound to witness extreme volatility when the small-cap stocks are under pressure or see a sharp correction. However, the fund’s ability to recognise worthy companies at an early stage of development may help it do well in the long run.

Given its penchant for high risk oriented small-caps, SBI Small Cap Fund is suitable only for investors having a very high risk appetite and a longer investment horizon over 5-7 years.

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This article first appeared on PersonalFN here