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

HDFC Small Cap Fund is one of the most popular schemes in the Small Cap Fund category that has bounced back with superior gains in recent years after witnessing a bout of underperformance.

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

Graph 1

Past performance is not an indicator of future returns
June 28, 2023
(Source: ACE MF) 

HDFC Small Cap Fund was launched in April 2008 as a Multi-cap Fund and was later rechristened as HDFC Small and Midcap Fund. A couple of years later, HDFC Mutual Fund once again changed the name of the fund to HDFC Small Cap Fund and was categorised under the Small Cap Fund category. HDFC Small Cap Fund has established a solid track record of outperforming the benchmark and many of its peers across various time frames. Consequently, HDFC Small Cap Fund has grown in popularity. The fund has an AUM of Rs 17,333 crore as of May 31, 2023, making it the third largest scheme in the Small Cap Fund category. HDFC Small Cap Fund has done well under the supervision of Mr Chirag Setalvad, who is known for his high conviction long-term bets. Notably, HDFC Small Cap Fund visibly underperformed the benchmark and some of its peers between 2015-16 due to higher exposure to certain out-of-favour stocks such as PSUs and then between 2019-20 when many small-cap stocks reeled under pressure. Nonetheless, HDFC Small Cap Fund staged a comeback in the later half of 2020 when the market started trending upwards. In the last five years, HDFC Small Cap Fund recorded growth at a CAGR of 18.2%, compared to a CAGR of 14.3% delivered by its benchmark S&P BSE 250 Small Cap – TRI. An investment of Rs 10,000 in HDFC Small Cap Fund would have now appreciated to Rs 23,083.

HDFC 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 4,688 41.06 20.08 59.28 27.17 20.50 25.29 0.55
Nippon India Small Cap Fund 28,779 39.47 24.68 47.20 22.81 23.37 19.25 0.56
Canara Rob Small Cap Fund 5,986 26.56 22.29 45.33 18.41 0.56
ICICI Pru Smallcap Fund 5,466 29.25 21.20 44.04 21.69 18.80 18.23 0.56
HSBC Small Cap Fund 9,531 34.27 22.24 43.83 17.82 18.60 18.41 0.55
Bank of India Small Cap Fund 490 31.78 17.92 43.70 19.08 0.52
HDFC Small Cap Fund 17,333 45.56 21.41 43.69 18.20 20.55 19.12 0.53
Tata Small Cap Fund 4,458 39.41 21.41 43.33 17.43 0.56
Kotak Small Cap Fund 9,883 25.18 16.00 43.21 21.85 20.12 17.91 0.55
Edelweiss Small Cap Fund 1,756 33.40 19.28 43.03 18.19 0.53
S&P BSE 250 Small Cap – TRI 32.89 13.89 37.74 14.31 14.73 21.20 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 June 28, 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.

Following a bout of underperformance between 2019-20, HDFC Small Cap Fund delivered robust gains in the last couple of years. HDFC Small Cap Fund has outpaced the benchmark by an impressive margin of 7.5-12.5 percentage points in the past 1-year and 2-year periods, positioning itself among the top quartile performers in its category. The substantial improvement in the performance of HDFC Small Cap Fund in recent years has improved its track record over longer time frames of 5 years and 7 years, wherein it has surpassed many of its prominent peers and the benchmark.

The fund’s volatility is higher compared to the category average but much lower compared to the benchmark. The recent improvement in the fund’s performance is reflected in the fund’s Sharpe Ratio, which is currently much higher than the category average as well as the benchmark.

Investment strategy of HDFC Small Cap Fund

HDFC Small Cap Fund has a mandate to invest a minimum of 65% of its assets in small cap stocks i.e. companies ranking beyond 250 in terms of full market capitalisation. The fund also has the flexibility to invest up to 35% of its assets in stocks of mid and large-cap companies. HDFC Small Cap Fund aims to predominantly build a portfolio of small-cap companies which have reasonable growth prospects, sound financial strength, sustainable business models, and are available at reasonable valuations. HDFC Small Cap Fund takes a benchmark-agnostic approach and determines its overweight/underweight positions based on market outlook. The fund follows a bottom-up approach to identify high-quality growth-oriented stocks for the long term. HDFC Small Cap Fund follows a buy-and-approach to select stocks with a long-term view. The fund’s turnover is typically under the 10% mark, signifying a low level of portfolio churning.

Top portfolio holdings in HDFC Small Cap Fund

Graph 2Graph 2

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

As of May 31, 2023, HDFC Small Cap Fund held a large portfolio of 72 stocks, with the top 10 stocks accounting for 32.4% of its assets. HDFC Small Cap Fund usually restricts allocation in individual stocks to around 5%. Sonata Software, Bank of Baroda, Firstsource Solutions, Bajaj Electricals, and eClerx Services currently form part of the fund’s top holdings. Most of these stocks have been part of the fund’s portfolio for quite a long time.

In the last two years, HDFC Small Cap Fund benefitted immensely from its prominent exposure to Gujarat Fluorochemicals, KEI Industries, Sonata Software, Power Mech Projects, eClerx Services, Aster DM Healthcare, and Bank of Baroda. It has also benefitted from Apar Industries, Radico Khaitan, Kirloskar Ferrous India, SKF India, Chalet Hotels, The Great Eastern Shipping Company, and Carborundum Universal, among others.

HDFC Small Cap Fund has a well-balanced allocation towards cyclical and defensive sectors. HDFC Small Cap Fund has the highest exposure to Engineering stocks, closely followed by Infotech and Financials. Transportation, Auto Ancillaries, Power, Consumer Durables, Consumption, Healthcare services, and Textiles are among the other core sectors in the fund’s portfolio.


HDFC Small Cap Fund is backed by a process-driven fund house and has an experienced fund manager at helm, which has enabled it to establish a decent long-term performance track record. Even though the fund’s underperformance during 2015-16 and 2019-20 was a cause for concern for its investors, the fund has made a strong comeback in recent years and has significantly improved its overall performance track record.

HDFC Small Cap Fund focuses on maintaining a well-diversified portfolio comprising fundamentally sound, high-quality small-cap stocks spread across sectors and holds them with a long-term view to mitigate market risk. This strategy can help it to do well over complete market cycles, even though it may witness bouts of underperformance in the short-term.

HDFC Small Cap Fund is suitable only for investors with a high risk appetite and a long term investment horizon of at least 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

Leave a Reply

Your email address will not be published. Required fields are marked *