Small Cap Mutual Funds are high risk – high return equity mutual funds. Investment in Small Cap Mutual Funds is associated with higher risk levels compared to Mid Cap Funds and Large Cap Funds as they invest in lesser-known and under-researched companies. Over the short and medium, Small Cap Funds can witness intense volatility and higher downside, particularly during bearish market phases. Nonetheless, they can generate significant alpha and even outperform most other sub-categories of equity-oriented mutual funds over the long term.

Click here to find out PersonalFN’s list of the 5 best Small Cap Funds to invest in 2023.

SBI Small Cap Fund is one of the most popular schemes in the Small Cap Fund category that has generated significant alpha for its investors in the long run.

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

Graph 1

Past performance is not an indicator of future returns
Data as of March 07, 2023
(Source: ACE MF) 

Launched in September 2009, SBI Small Cap Fund is the second-largest scheme in the Small Cap Fund category. The fund has well established itself in the Small Cap Fund category due to its superior long-term track record, wherein it stands among the top quartile performers. SBI Small Cap Fund’s robust performance over the years has attracted investors’ attention. Consequently, its corpus size has more than doubled in the last couple of years. The fund efficiently limited the downside risk during the mid and small-cap crash of 2018 as well as the market crash of early 2020. However, the fund could not fully participate in the ensuing bull phase. Nonetheless, over the last 5-year period, SBI Small Cap Fund has been among the top performer in its category and has rewarded investors with a CAGR of around 15.5%, as against the 8.4% CAGR delivered by its benchmark S&P BSE 250 Small-Cap – TRI, thus generating an alpha of around 7% CAGR for its investors. An investment of Rs 10,000 in SBI Small Cap Fund five years back would have appreciated to Rs 20,544 compared to a valuation of Rs 14,969 for its benchmark. While the fund is prone to high risk, it still has the ability to compensate long-term investors with superior returns and reward them for their patience.

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 3,134 18.06 34.98 54.64 24.62 19.08 32.13 0.38
Nippon India Small Cap Fund 23,756 19.55 26.32 35.89 16.73 22.95 27.92 0.29
HSBC Small Cap Fund 8,672 14.71 27.06 32.25 12.81 18.83 27.38 0.27
HDFC Small Cap Fund 14,630 20.45 24.76 32.17 13.95 20.37 27.70 0.26
Kotak Small Cap Fund 8,573 7.79 18.51 31.70 17.23 20.37 26.78 0.27
ICICI Pru Smallcap Fund 4,625 15.10 22.31 30.07 14.87 17.91 27.70 0.26
SBI Small Cap Fund 15,292 15.11 18.92 28.73 15.48 21.93 23.77 0.27
DSP Small Cap Fund 9,115 10.13 19.53 28.67 12.61 17.38 26.30 0.25
Franklin India Smaller Cos Fund 7,174 18.04 20.58 28.41 11.43 16.36 26.74 0.24
Sundaram Small Cap Fund 2,004 11.38 20.83 28.10 9.87 15.37 28.26 0.22
S&P BSE 250 Small Cap – TRI 8.33 14.66 26.95 8.40 14.91 30.26 0.21

Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as of March 07, 2023
(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 stands out for its ability to showcase superior performance across most time periods and generate significant alpha for its investors. While the fund has significantly outperformed the benchmark S&P BSE 250 Small-Cap – TRI and the category average during bull market phases in the past, its performance during bear phases has been commendable too. Over the longer time period of 5 years and 7 years, the fund outpaced its benchmark by a noticeable margin of around 7 percentage points. Even the short-term performance of the fund is encouraging, wherein it has outpaced its benchmark by a wide margin but has trailed some of its peers.

This outperformance has come at a relatively reasonable risk. The fund’s Standard Deviation is much lower than that of its benchmark and the category average, whereas it has outperformed many of its peers and the benchmark in terms of risk-adjusted returns (as denoted by the Sharpe Ratio).

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 a minimum of 65% of its investment in equity & equity-related instruments of small-cap companies (companies ranking 251st onwards in terms of full market capitalisation, as defined by SEBI).

SBI Small Cap Fund follows a blend of growth and value style of investing. The fund 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 valuations and does not resist from taking a few short-term calls. It 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

Graph 2Graph 2

Holding in (%) as of January 31, 2023
(Source: ACE MF) 

SBI Small Cap Fund usually holds a fairly-diversified portfolio of about 45 to 50 stocks. As of January 31, 2023, the fund held 52 stocks in its portfolio, reasonably diversified across sectors. Among its top holdings, the fund held exposure to Blue Star, Carborundum Universal, Kalpataru Power Transmission, V-Guard Industries, and Vedant Fashions, among others. The top 10 stocks in the fund’s portfolio collectively account for 28.4% of its assets.

In the last two years, SBI Small Cap Fund has benefited immensely from its holdings in Elgi Equipments, Carborundum Universal, Triveni Turbine, Rajratan Global Wire, Timken India, Grindwell Norton, Lemon Tree Hotels, Chalet Hotels, Blue Star, Narayana Hrudalaya, Navin Flourine International, among others.

The major portion of the fund’s portfolio is currently inclined towards Engineering (19.5% of its assets), followed by Chemicals, Consumer Durables, and Consumption, with allocation in the range of 9-10% in each. Construction, Retail, Hotels, Auto Ancillaries, and Power are among the other prominent sectors in the portfolio. The fund’s portfolio is spread across cyclicals and sensitive sectors, with significant exposure to defensives.

Suitability

SBI Small Cap Fund is one of the well-managed schemes in the small Cap Fund category that has built a solid track record for itself and has rewarded its investors well since its inception. 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 in conditions 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 of at least 7 years.

Do note that SBI Small Cap Fund has stopped accepting lumpsum investments with effect from September 07, 2020, in order to avoid capacity constraints. Fresh investment is only accepted through SIP mode and is capped at Rs 25,000 per month per PAN.

This article first appeared on PersonalFN here


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