Welcome to  PersonalFN’s weekly analysis on diversified equity mutual funds. In this issue, we have analysed Nippon India Small Cap Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

Nippon India Small Cap Fund is the largest scheme in the Small Cap Fund category having a track record of over a decade. The fund is managed by Mr Samir Rachh who has a work experience of over two decades in the field of research and fund management.

Growth of Rs 10,000 if invested in Nippon India Small Cap Fund 5 years ago

Graph 1

Past performance is not an indicator of future returns
May 24, 2023
(Source: ACE MF)  

Having a corpus of Rs 26,294 crore, Nippon India Small Cap Fund is currently the largest scheme in the Small Cap Fund category. Since its inception in September 2010, Nippon India Small Cap Fund has done well across market phases and built an impressive track record of superior performance. This has resulted in the scheme becoming popular among aggressive investors. The fund uses diversification as a risk-mitigation technique and holds a large portfolio of over 150 stocks spread across sectors. Nippon India Small Cap Fund aims to identify small-sized companies with high-growth potential that are available at relatively attractive valuations. Nippon India Small Cap Fund now stands among the top quartile performers in the Small Cap Fund category across time frames and has generated market-beating returns. In the last 5 years, Nippon India Small Cap Fund has grown at a CAGR of 19.2% compared to a growth of 10.6% in its benchmark Nifty Smallcap 250 – TRI. An investment of Rs 10,000 in Nippon India Small Cap Fund five years back would now be worth Rs 24,083, while a simultaneous investment in its benchmark would now be valued at Rs 16,541.

Nippon India 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 4,092 27.06 21.28 65.98 25.60 19.46 26.09 0.56
Nippon India Small Cap Fund 26,294 29.30 23.78 51.80 19.21 22.89 19.89 0.55
HSBC Small Cap Fund 9,163 24.61 22.98 49.18 14.80 18.39 19.20 0.55
Canara Rob Small Cap Fund 5,482 15.89 21.16 47.83 18.79 0.56
HDFC Small Cap Fund 15,857 31.90 21.50 48.86 15.23 20.20 19.96 0.52
Kotak Small Cap Fund 9,230 14.04 15.62 48.13 18.49 19.86 18.79 0.54
Franklin India Smaller Cos Fund 7,593 29.99 20.56 46.57 13.08 15.69 19.07 0.51
DSP Small Cap Fund 9,409 14.51 16.58 43.60 14.97 16.42 19.25 0.48
SBI Small Cap Fund 16,592 18.69 16.79 41.43 17.17 21.54 17.41 0.50
Axis Small Cap Fund 12,257 20.29 18.56 40.65 21.46 20.85 15.56 0.54
Nifty Smallcap 250 – TRI 15.70 12.06 43.08 10.58 14.01 22.34 0.42

The securities quoted are for illustration only and are not recommendatory 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 May 24, 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 before investing. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

Nippon India Small Cap Fund was able to capitalise on the sharp run-up in the small-cap space seen in the last few years, which helped it find a spot among the top quartile performers in its category across time frames. In the last 1-year, 2-year, and 3-year time periods, Nippon India Small Cap Fund has outperformed the benchmark Nifty Smallcap 250 – TRI by a margin of around 8-14 percentage points and outpaced most of its peers by a broad margin. Even over the longer time period of 5 years and 7 years, the fund has managed to generate a substantial lead over the benchmark and the category average.

The fund’s focus on quality stocks and holding on to them with a long-term view has helped it outperform the benchmark and its peers. Even though its volatility, as denoted by the Standard Deviation (19.89%) is slightly higher than the category average, it is much lower than the benchmark. Moreover, its Sharpe ratio (0.55), a measure of risk-adjusted return, is currently among the best in the category and far ahead of the benchmark.

Investment strategy of Nippon India Small Cap Fund

Categorised as a Small Cap Fund, Nippon India Small Cap Fund is mandated to invest a minimum of 65% of its assets in equity and equity-related instruments of small-cap companies. SEBI defines small-cap stocks as companies ranking 251st onwards in terms of full market capitalisation. Nippon India Small Cap Fund aims to build a portfolio that adequately reflects a cross-section of the growth areas of the economy from time to time. The scheme’s investment philosophy focuses on investing in companies with long-term growth potential available at reasonable valuations. It looks to identify high-growth businesses with reasonable size, quality management, and rational valuation.

The fund manager adopts risk management measures such as margin of safety and diversification across sectors and stocks with an aim to generate relatively better risk-adjusted returns over a period of time. Nippon India Small Cap Fund holds a large portfolio of more than 150 stocks to benefit from an optimal mix of growth, economic revival, value, and thematic plays. The fund also allocates a significant portion of its portfolio in stocks of large-cap and mid-cap companies depending on market conditions to minimise the high risk associated with small-cap stocks. Nippon India Small Cap Fund follows a buy-and-hold strategy for most of its stock holdings and has recorded a low turnover rate of 25-30% in the last one year.

Top portfolio holdings in Nippon India Small Cap Fund

Graph 2Graph 2

Holding in (%) as of April 30, 2023
(Source: ACE MF)  

Nippon India Small Cap Fund holds a large number of stocks in the portfolio and limits the exposure to individual stocks to well under 5% in order to reduce the high downside risk associated with small-sized companies. As of April 30, 2023, the fund held 169 stocks in the portfolio, with the top 10 stocks accounting for just 17% of its assets. Small-cap names such as NIIT, Balrampur Chini Mills, Tejas Networks, and Zydus Wellness currently form part of the fund’s top 10 holdings, along with a few large-cap and mid-cap names such as Tube Investments of India, HDFC Bank, KPIT Technologoies, Bank of Baroda, Navin Fluorine International, and L&T.

In the last two years, the fund has benefited the most from its holdings in KPIT Technologies, Tube Investments of India, Apar Industries, Tejas Networks, and Radico Khaitan that have turned out to be multi-baggers, contributing around 15% to its absolute gains in the last two years. It also gained from its exposure to Raymond, NIIT, Carborundum Universal, Poonawala Fincorp, Timken India, Navin Flourine International, and West Coast Paper Mills, among many others.

Nippon India Small Cap Fund’s portfolio is well-diversified across Cyclical and Defensive sectors. The fund’s portfolio is currently skewed towards the Engineering sector, followed by Financials. These sectors collectively account for 39% of Nippon India Small Cap Fund’s assets. It also holds substantial exposure to Infotech, Consumer Durables, Consumption, and Chemicals having allocation in the range of 5-9%. The top 5 sectors account for 55.5% of its assets.

This article first appeared on PersonalFN here

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