Certain mutual funds categories, such as Small Cap Funds, carry high risk. But when you choose the right scheme, it can prove to be extremely rewarding. Notably, most of the exponential wealth-creation stories are from the midcap and small-cap segments.

Interim market corrections offer you the opportunity to invest in such high-risk mutual funds that may reward you handsomely over the long run.

Axis Small Cap Fund is a Small Cap Fund that has clearly stood out in terms of performance, particularly during bearish market phases, and has generated superior risk-adjusted returns for its investors in the long run.

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

Past performance is not an indicator of future returns
Data as on October 04, 2022
(Source: ACE MF) 

Axis Small Cap Fund aims to invest in high growth-oriented quality stocks available at attractive valuations and hold it with a long-term view until the full potential is derived. The fund stood among the top performers in the Small-cap Fund category during the market crash of 2020. However, it lagged many of its peers and the benchmark in the ensuing bull phase. Nonetheless, the fund showed resilience once the market started witnessing sharp volatility from October 2021 onwards. Given its ability to contain the downside risk during bearish market phases, Axis Small Cap Fund has been able to establish itself in the small-cap space. The fund’s focus on high-quality growth stocks and the superior stock-picking ability of the fund management team has driven its performance. Over the last 5-year period, Axis Small Cap Fund has generated returns at a CAGR of 21.3%, thereby clearly outperforming the benchmark Nifty Smallcap 250 – TRI by a margin of about 12 percentage points. An investment of Rs 10,000 in Axis Small Cap Fund 5 years back would have now appreciated to Rs 26,110 compared to a valuation of Rs 15,612 in its benchmark.

Table: Axis 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	2,079	2.90	51.13	53.47	22.33	18.05	32.35	0.40
Nippon India Small Cap Fund	21,655	11.35	47.97	36.75	19.43	21.08	28.00	0.33
Kotak Small Cap Fund	8,356	3.96	46.16	36.12	19.49	19.37	26.79	0.34
Union Small Cap Fund	981	10.37	41.30	35.01	16.79	15.41	25.58	0.34
DSP Small Cap Fund	8,982	7.14	37.83	33.10	14.49	16.06	26.51	0.31
ICICI Pru Smallcap Fund	4,138	7.78	45.62	32.62	16.80	16.55	27.62	0.31
SBI Small Cap Fund	14,044	13.66	41.23	32.61	19.21	21.66	23.62	0.33
L&T Emerging Businesses Fund	8,395	8.59	46.59	30.19	14.65	19.01	27.60	0.28
Axis Small Cap Fund	10,436	7.42	39.63	30.19	21.30	19.64	23.14	0.33
HDFC Small Cap Fund	13,797	3.96	42.50	27.74	16.10	18.05	28.01	0.25
Nifty Smallcap 250 – TRI		-1.48	36.88	28.23	9.60	12.58	30.52	0.25

Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on October 04, 2022
(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 a superior track record of generating substantial alpha for its investors with a spectacular performance in the last few years. The fund has outperformed its benchmark and category peers with a noticeable margin and has found a place among the top performers in the Small-cap Fund category over long-term time frames. Even though Axis Small Cap Fund has often trailed its benchmark and many of its peers during bull phases, the fund clearly stands out during bearish market phases, thus rewarding investors well over a complete market cycle

Despite holding a high-risk investment mandate, Axis Small Cap Fund has registered far lower volatility (standard deviation) when compared to its benchmark and most of its peers. 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 much higher compared to the benchmark and many of its peers.

Investment strategy of Axis Small Cap Fund

Axis Small Cap Fund is mandated to invest a minimum of 65% of its assets in equity & equity-related instruments of small-cap companies, i.e. companies ranking 251st onwards, on a full market capitalisation basis. It can also invest up to 35% of its assets in equity and equity-related instruments of non-small cap companies, as well as debt & money market instruments.

Small-cap companies, as they are in a stage of growth, may not be valued at their fair price. However, the fund intends to identify strong growth companies and take advantage of their future appreciation. 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 enjoying sustainable competitive advantages compared to their competitors.

While building the portfolio, the fund management follows the bottom-up approach to investing, focusing on the appreciation potential of individual stocks from a fundamental perspective. It seeks to identify long-term businesses keeping in mind risk and reward by containing mistakes and navigating volatile stock movements. The fund house believes that the key to successful investing in small-caps is patience and the ability to withstand short-term volatility. 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 of August 31, 2022
(Source: ACE MF) 

As of August 31, 2022, the fund held 74 stocks in its portfolio, with top holdings in names such as Fine Organic Industries, Galaxy Surfactants, Narayana Hrudayalaya, Brigade Enterprises, and Birlasoft. The top 10 stocks in the portfolio together accounted for around 35.1% of its assets. Following a buy-and-hold approach, the fund has a low turnover ratio of around 15-20%, which highlights the fund manager’s conviction in each of its holdings.

Axis Small Cap Fund has benefited the most from its exposure in Tata Elxsi, Brigade Enterprises, Grindwell Norton, RHI Magnesita India, and Narayana Hrudayalaya, which turned out to be the major contributors to its performance in the last one year.

Chemicals dominate Axis Small Cap Fund’s portfolio with an allocation of close to 16%. The fund also holds significant exposure in Infotech, Construction, Engineering, Healthcare Services, Auto Ancillaries, Finance, Consumption, and Cement, among others. Overall, the fund’s portfolio appears well-positioned to sail through market volatility going ahead.

Suitability

Axis Small Cap Fund has proven its ability to generate superior returns even in conditions where most of its peers found it challenging to limit the downside. The fund has been agile enough to take advantage of various investment opportunities present in the small-cap space as well as a mid-cap segment. It aims to invest in high growth-oriented quality stocks available at attractive valuations and hold it with a long-term view until the 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. Even if the performance of the fund has not been very attractive during upside market rallies, it has proven the ability to limit downside risk during extreme conditions, which results in superior returns over complete market cycles.

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

This article first appeared on PersonalFN here