After recording a stupendous rally in the past 18 months, the Nifty Small Cap 100 index reached its all-time high level of 11,677 on October 18, 2021. However, the small-cap segment has witnessed some consolidation in the past few days and is down by around 7% from its peak (as of October 28, 2021).

We will have to wait and watch if this indicates the reversal of bullish momentum in the broader market or if the market bounces back again. Investors should note that past returns are not an indication of future returns. Therefore, you should avoid investing in small-cap funds with a short term view expecting similar returns in the coming months.

If you are an aggressive investor looking to fulfil various long term goals, then you can consider including small-cap funds in the satellite portion of your equity mutual fund portfolio. Ensure that you select only well-managed funds in the small-cap category.

Axis Small Cap Fund is one such small-cap fund that has generated superior risk-adjusted returns for its long term investors by focusing on quality stocks in the small-cap segment.

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

Data as on October 27, 2021
(Source: ACE MF)  

Launched in November 2013, Axis Small Cap Fund is a popular fund in the small-cap fund category that has been agile enough to take advantage of various investment opportunities present in the small-cap space. Notably, Axis Small Cap Fund’s performance had suffered between 2016 and 2018 wherein it trailed the benchmark and the category average. However, the fund’s focus on high conviction bets and quality growth stocks in the small-cap segment enabled it to make a strong comeback and become an outperformer in the category. Axis Small Cap Fund’s robust performance in the past few years has caught the attraction of investors — it has shown a massive growth in AUM from just about Rs 1,000 crore at the end of September 2019 to over Rs 7,300 crore at present. Over the last 5-years, Axis Small Cap Fund has generated returns at 22.6% CAGR, thereby outperforming the benchmark Nifty Small Cap 100 – TRI by a healthy margin of around 10 percentage point on a CAGR basis.

Table: Axis Small Cap Fund’s performance vis-a-vis category peers

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
Quant Small Cap Fund	1,158	122.91	84.74	39.95	23.45	19.44	32.85	0.31
Kotak Small Cap Fund	5,969	104.64	54.67	38.39	22.17	22.22	26.69	0.34
Axis Small Cap Fund	7,303	77.34	39.85	35.80	22.64	20.99	22.02	0.38
ICICI Pru Smallcap Fund	3,187	96.91	45.74	34.61	18.84	16.92	27.90	0.31
SBI Small Cap Fund	10,191	77.50	42.07	31.31	22.95	24.99	23.22	0.31
Nippon India Small Cap Fund	17,282	98.39	49.27	31.23	22.11	21.75	27.57	0.28
Union Small Cap Fund	564	78.64	45.88	30.71	17.35	15.54	25.18	0.29
DSP Small Cap Fund	8,306	77.43	46.50	30.02	15.64	19.59	26.21	0.28
Sundaram Small Cap Fund	1,556	88.16	43.10	27.79	13.39	14.93	28.63	0.24
HSBC Small Cap Equity Fund	337	89.96	44.44	27.19	15.18	16.39	27.37	0.25
Nifty Smallcap 100 – TRI		86.94	40.82	25.44	12.76	13.31	31.62	0.22

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on October 27, 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.

Axis Small Cap Fund has scripted an unbeatable track record of generating substantial alpha for its investors with spectacular performance in the last few years. What makes Axis Small Cap Fund far more attractive is its ability to generate superior returns even in conditions where most of its peers found it challenging to limit the downside. Even though Axis Small Cap Fund has trailed the benchmark and many of its peers by a significant margin in the last 1 year period, the fund stands among the top performers in the small-cap funds category over the longer time period of 3 years or more.

Despite holding a high-risk investment mandate, Axis Small Cap Fund has registered far lower volatility (standard deviation) when compared to its peers and the benchmark. The cautious investment approach followed at the fund house has helped Axis Small Cap Fund deliver superior risk-adjusted returns for its investors. Its Sharpe ratio is commendable and is currently the highest in the category.

Investment Strategy of Axis Small Cap Fund

Axis Small Cap Fund has a mandate to invest a minimum 65% of its assets in equity & equity related instruments of small-cap companies, i.e. companies ranking 251st onwards on full market capitalisation basis. Accordingly, Axis Small Cap Fund endeavours to invest primarily in high conviction small-cap stocks (around 65-70% of its assets). It also holds around 20-25% of its assets in mid-cap stocks.

The fund house employs a “Fair value” based research process to analyse the appreciation potential of each stock in its universe (fair value is a measure of the intrinsic worth of a company). The universe of stocks is carefully selected to include companies having robust business models and enjoy sustainable competitive advantages as compared to their competitors.

While building the portfolio, the fund management follows the bottom-up approach towards investing with focus on the growth potential of individual stocks from a fundamental perspective. It seeks to identify long term businesses, keeping in mind the risk and reward by containing mistakes and navigating volatile stock market movements.

The fund house believes that the key to successful investing in small-cap stocks is patience and ability to withstand short term volatility. Accordingly, Axis Small Cap Fund utilises a holistic risk management strategy, in order to manage risks associated with investing in equity markets.

Graph 2: Top portfolio holdings in Axis Small Cap Fund

Holding in (%) as on September 30, 2021
(Source: ACE MF)  

Axis Small Cap Fund is selective in its stock picks and usually holds a fairly diversified portfolio of about 45-50 stocks. However, given the growing size of its corpus, it has added several new names to its portfolio in the recent months. As on September 30, 2021, Axis Small Cap Fund held 59 stocks spread across small and mid-cap space. Among its top holdings the fund held names like Tata Elxsi, Galaxy Surfactants, Brigade Enterprise, JK Lakshmi Cement, and CCL Products (India). The top 10 stocks in the portfolio together accounted for around 37.2% of its assets.

In the past one year, Axis Small Cap Fund has benefited majorly from its exposure to Tata Elxsi that turned out to be multi-bagger in the portfolio. Brigade Enterprise, Galaxy Surfactants, Coforge, SRF, JK Lakshmi Cement, JK Cement, etc. stood among the major contributors to its performance.

Chemicals dominate Axis SmallCap Fund’s portfolio with an allocation of around 17.1% of its holdings. The fund also holds significant exposure in Infotech, Construction, Banking & Finance, Engineering, Auto Ancillaries, Healthcare, Cement, Consumption, among others.

Suitability

Axis Small Cap Fund aims to invest in high growth-oriented quality stocks available at attractive valuations and holds them with a long term view until their full potential is derived. Despite being a growth-oriented small-cap fund of aggressive nature, Axis Small Cap Fund does not resort to taking aggressive calls or momentum bets and focuses on quality. This helps Axis Small Cap Fund to stand strong during depressing market conditions.

Axis Small Cap Fund has proven the ability to limit downside risk during extreme conditions even though it may not be among the best during market rallies. This shows Axis Small Cap Fund’s ability to deliver superior returns over complete market cycles.

The aggressive investment mandate along with higher allocation to mid and small-caps makes Axis Small Cap Fund suitable for investors having very high risk appetite and a long term investment horizon of at least 7-10 years.

This article first appeared on PersonalFN here