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

DSP Small Cap Fund is a Small Cap Fund that was once a category outperformer but has witnessed muted growth over the past few years compared to its prominent peers and the benchmark. Nonetheless, the fund still boasts a decent long-term track record.

What is the growth of Rs 10,000 invested in DSP Small Cap Fund five years ago?

Past performance is not an indicator of future returns
Data as of December 26, 2023
(Source: ACE MF, data collated by PersonalFN) 

Launched in June 2007, DSP Small Cap Fund was originally launched as a scheme focusing on micro-cap stocks. The focus on small and micro-cap segments enabled the fund to generate high alpha, thereby rewarding aggressive investors. It was later recategorised as a Small Cap Fund in 2018 to align with SEBI’s classification norms.

Having a track record of over 16 years, the fund established a superior margin of outperformance over its benchmark over longer time periods in the past. Due to its growing asset size, DSP Small Cap Fund temporarily restricted fresh inflows in the scheme in 2014, before revoking it in 2020.

However, the fund’s returns over the last few years have been subdued, during which it has lagged the benchmark and its category peers by a noticeable margin. Some of the sectoral and thematic calls of the fund did not perform as expected, while a few others took time to pay off. Notably, the fund was also underweight on certain top-performing sectors such as Infotech, which resulted in the underperformance of the scheme in 2018 and then from 2021 onwards.

That said, the long-term performance of the fund is still encouraging compared to the benchmark although it has lagged many of its rivals. Over the past 5 years, DSP Small Cap Fund has generated a CAGR of around 25.9% as against 22.2% generated by the benchmark S&P BSE 250 Small Cap – TRI index. An investment of Rs 10,000 in the fund, 5 years back would have grown to about Rs 31,692 as against a valuation of Rs 27,257 in the benchmark index.

How has DSP Small Cap Fund performed in the past?

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
Quant Small Cap Fund	11,207	52.17	29.25	47.01	33.62	24.26	21.38	0.48
Nippon India Small Cap Fund	41,019	52.22	28.82	42.11	29.52	26.62	17.42	0.53
HSBC Small Cap Fund	12,795	49.32	24.21	39.38	24.07	22.96	16.95	0.52
HDFC Small Cap Fund	25,409	48.70	25.09	37.39	23.41	23.67	17.29	0.49
Franklin India Smaller Cos Fund	10,777	55.34	28.46	36.99	23.89	20.17	16.61	0.49
Canara Rob Small Cap Fund	8,642	34.65	21.55	36.77	—	—	16.67	0.49
Kotak Small Cap Fund	13,377	37.14	16.86	33.07	27.85	22.99	15.85	0.45
DSP Small Cap Fund	13,095	45.50	21.56	32.76	25.93	19.45	16.65	0.43
Axis Small Cap Fund	17,916	36.41	20.08	31.61	28.08	23.95	13.91	0.50
SBI Small Cap Fund	22,895	27.15	18.68	27.78	24.70	23.86	14.06	0.43
S&P BSE 250 Small Cap – TRI		48.56	22.14	32.73	22.19	18.79	19.26	0.38

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 of December 26, 2023
(Source: ACE MF, data collated by PersonalFN)
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.

Once a top-performing scheme that was known for its multibagger returns, DSP Small Cap Fund has struggled to keep pace with the benchmark and many of its prominent category peers in the last few years. In the last 1-year and 2-year period, DSP Small Cap Fund has trailed the benchmark and many of its prominent peers. However, over the longer term horizon of 5 years and 7 years, the fund has done well compared to the benchmark and some of its peers.

DSP Small Cap Fund has fared reasonably in terms of risk-reward parameters. The volatility registered by the fund is lower than the benchmark and in line with the category average. Its risk-adjusted returns, as denoted by the Sharpe ratio, outpaces that of the benchmark but falls behind the category average.

[Read: Will Small Cap Mutual Funds Continue to Outshine in 2024?]

What is the investment strategy of DSP Small Cap Fund?

DSP 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 those ranking beyond 250th based on market capitalisation. The fund utilises a blend of growth and value strategy to pick stocks.

The fund manager conducts in-house research in order to identify various investment opportunities. The company-wise analysis focuses on the historical and current financial condition of the company, potential value creation/unlocking of value and its impact on earnings growth, capital structure, business prospects, policy environment, strength of management, responsiveness to business conditions, product profile, brand equity, market share, competitive edge, research, technological knowhow and transparency in corporate governance.

The fund’s allocation in small-cap stocks ranges around 75% to 85% of its assets, along with exposure of around 10% to 20% in mid caps, and near-zero allocation in large caps. The fund stays fully invested and rarely takes aggressive cash calls.

What are the top portfolio holdings in DSP Small Cap Fund?

Holding in (%) as of November 30, 2023
(Source: ACE MF, data collated by PersonalFN) 

DSP Small Cap Fund usually holds about 70-80 stocks in its portfolio, with single stock exposure rarely exceeding the 5% mark. As of November 30, 2023, the fund held 73 stocks in the portfolio, with the top 10 stocks accounting for 28.2% of its assets. Popular small-cap names such as Cyient, Ratnamani Metals & Tubes, eClerx Services, Triveni Engineering & Industries, and Suprajit Engineering currently form part of the fund’s top holdings. The fund has high conviction in its stocks and prefers following a ‘buy-and-hold’ investment strategy even if it results in underperformance in the short run.

In the last two years, DSP Small Cap Fund benefitted from its holdings in Ratnamani Metals & Tubes, KPR Mill, LT Foods, Triveni Engineering & Industries, Welspun Corp, Techno Electric and Engineering, Greenlam Industries, APL Apollo Tubes, Voltamp Transformers, and eClerx Services, among others. Meanwhile, its exposure to stocks such as Sheela Foam, Atul, Chambal Fertilisers and Chemicals, and Amrutanjan Health Care were among stocks that eroded some of its gains.

Sector wise, DSP Small Cap Fund has higher exposure in Engineering and Consumption that collectively form 31.5% of its assets. It also holds substantial allocation in Infotech, Metals, Consumer Durables, Chemicals, Auto Ancillaries, Pharma, Fertilisers, and Finance, among others.

Is DSP Small Cap Fund suitable for my investment goals and risk tolerance?

DSP Small Cap Fund has struggled to keep pace with peers in the last few years. Despite this, the fund has generated reasonable risk-adjusted returns compared to the benchmark index. The fund maintains a well-diversified portfolio of quality stocks across sectors. Moreover, DSP Small Cap Fund has experienced fund managers at the helm, including seasoned fund manager Mr Vinit Sambre. Under their supervision, the fund can potentially bounce back with strong gains.

The fund adopts a ‘buy-and-hold’ investment approach in fundamentally sound stocks. Accordingly, the fund may underperform during momentum-driven market rallies. However, the scheme’s performance may be in contrast to its peers that hold higher allocation to stocks in the large-cap segment.

DSP Small Cap Fund is suitable for aggressive investors looking to benefit from the growth of quality stocks in the small-cap space with an investment horizon of at least 5-7 years.

Watch this video to find out PersonalFN’s list of the best Small Cap Funds for 2024:

 

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