HDFC Small Cap Fund has delivered a 20.7% return in a year in which small cap funds are struggling. Its benchmark, the Nifty Small Cap 100 TRI (Total Return Index) has delivered just 2.16%. The small cap universe is huge with about 5,000 companies on offer compared to just 250 companies in the large and mid cap space. This allows small cap funds to diverge widely from their benchmark with underperformance or outperformance.
|Fund/Index||1 year||3 years||5 years||10 years|
|HDFC Small Cap Fund||20.75%||21.18%||24.37%||16.67%|
|Nifty Small Cap 100||2.16%||13.51%||21.10%||–|
Source: Value Research, Data as observed on 20th June 2018, Data for regular plans
HDFC Small Cap Fund has a fairly diversified portfolio with 67 stocks. Diversification is more important in the small-cap space where liquidity in individual stocks is poor. Funds such as HDFC Small Cap with an AUM of Rs 4,043 crore cannot run concentrated portfolios without being hit by poor liquidity when market sentiment turns bearish.
HDFC Small Cap Fund also departs heavily from the index in terms of sectoral allocation. It has just an 8% allocation to finance compared to 20.7% for its benchmark. Similarly, its construction exposure is just 4.4% compared to 11.4% on the index. Instead, the fund has assigned higher weights to healthcare and metal stocks of 4.6% and 4.5% respectively compared to 1.25% and 1.88% on the index. Its top three holdings are Firstsource Solutions, Sonata Software and NIIT Technologies. The fund is also sitting on a high level of cash at 13.8% of assets, indicating a cautious approach.
HDFC Small Cap Fund was launched in April 2008 and has only recently completed 10 years. It has been classified officially as a small-cap fund under SEBI rules. This means it must invest 65-100% of its assets in companies below the top 250 by market cap. The rest can be put into larger companies or debt. The fund has been managed by Chirag Setalvad and Rakesh Vyas since June 2014.
The fund has emerged as an outperformer in the small-cap space. Its managers do not hesitate to keep a high level of cash when necessary and depart strongly from the index in terms of sectors and companies. The small-cap space overall is richly valued but if you want some exposure to it, this might be a good fund to go for.