small cap funds better than average‘Smallcap funds’ have been at the wrong end of the performance stick for a while. Retail investors have been shunning the category as well. The category always attracted many small investors and retail money when the times are good. But the good times never last forever. Also, a sharp correction in smallcap stocks has meant that a lot of notional wealth created earlier as well as the new investments are under water.

For instance, the smallcap fund category 1-year average return is 0%. For SIP investors, the smallcap fund category 3-year average return is nearly 4% negative. But every smallcap fund is not poor-performing. We have a tendency to generalise things and paint everything with the same brush – when markets rise, we feel all funds are good and when markets fall, we are sure that all funds are duds. But the category average returns may mask the performance of real market beating funds. So key to investing is picking the right fund from a category.

Despite the prevalent negative situation, smallcap funds over 10-20 years create serious amount of wealth. This is the reason smallcap funds are a part of all seasoned MF investors’ portfolio. Are there smallcap funds that have done better than average? What are the ways in which we can find out the best smallcap funds from the rubble? RupeeIQ did a study to help find answers to these commonly asked questions. Here are our findings.

Better than average

Markets move according to their mood. It is next to impossible to guess how markets or a particular smallcap fund will perform in their future. Hence, it is important to study returns and see how a fund has been performing compared to own peers, benchmark etc. across different periods of time.

We have selected three periods of time – 1 year, 3 year and 5 year. The only purpose of a actively managed mutual fund is to beat the benchmark. We chose the S&P BSE Small Cap Index as the benchmark to beat and wanted to see how many beat this index in the 1 yr, 3 and 5 yr periods. We look at regular plans only for this study.

–The S&P BSE Small Cap index has lost 8% in last one year and 12 out of 15 funds were able to beat it.
–The S&P BSE Small Cap index over last 3 years rose by 0.05% CAGR and 9 of 14 funds were able to beat it.
–In the 5 yr period, the S&P BSE Small Cap index has gained 4.94% CAGR and 13 out of 14 funds were able to beat it.

As you may understand from the above, it seems that the benchmark was easy to beat for a majority of funds. This is why, we wanted to dig a bit deeper and find the funds that were better than average. By average, we mean the smallcap fund category average.

While the S&P BSE Small Cap index lost 8% in a 1-year period, the smallcap fund category average was flat at 0%. Merely changing the benchmark to category average meant that 10 of 15 smallcap funds struggled to beat it.

While the S&P BSE Small Cap index over last 3 years rose by 0.05% CAGR, the smallcap fund category average for the same period was 2.86%. As many as 7 of 14 funds failed to beat the category average in last three years.

While the S&P BSE Small Cap index over last five years rose by 4.94% CAGR, the smallcap fund category average stood at 9.86% in the same period. As many as 6 of 14 funds failed to beat the category average in the last five years.

Sustained performers

To stand out amongst the crowd, a fund should be able to beat its category return in 1 yr, 3 yr and 5 yr time periods. Plus, it should be able to beat our selected benchmark’s return also in 1 yr, 3 yr and 5 yr time periods.

Result: There were only 2 smallcap funds that were able to beat both the category average returns and our selected benchmark returns across the 1 yr, 3 yr and 5 yr time periods.

Fund 1 – Axis Small Cap Fund – Regular Plan has delivered an astounding 22.64% returrn in 1 year time period, which is a rarity given the state of smallcap funds and smallcap stocks. In the 3 year period, the fund has given a respectable 10.79% CAGR and in the 5 year period, it has delivered 13.28% CAGR. The fund has comfortably beat the category average and the selected benchmark.

Fund 2 – SBI Small Cap Fund – Regular Plan has delivered a healthy 7.13% return in 1 year period, which is 15 percentage points better than the S&P BSE Small Cap index. In the 3-year period, the SBI Small Cap Fund has given 10.84% CAGR. In the 5-year period the CAGR is 17.78%, even better than Axis Small Cap Fund. The fund has comfortably beat the category average and the selected benchmark.

The lump sum outperformers

Fund 1-Year Return 3-Year Return 5-Year Return
Axis Small Cap Fund 22.64 10.79 13.28
SBI Small Cap Fund 7.13 10.84 17.78
Equity: Small Cap 0 2.86 9.86
S&P BSE Small Cap Index -8 0.05 4.94
Returns more than 1 year are expressed in CAGR %

SIP performance

We also did the above study for SIP investments in smallcap funds. We tried to look at funds that are able to beat its SIP category return in 1 yr, 3 yr and 5 yr time periods.

While funds like HDFC Small Cap Fund and Nippon India Small Cap Fund were able to beat the SIP category returns in 3 yr and 5 yr time periods, they found it tough to beat the 1 yr category average. Similarly, Union Small Cap Fund was able to beat the 1 yr and 3 yr category average, but found it hard to cross the 5 yr threshold. Some funds like L&T Emerging Businesses Fund have beaten the 5 yr category average return, but under-performed 1 yr and 3 yr SIP category average return.

Only 4 funds were able to beat SIP category average return in 1 yr, 3yr and 5 yr. Apart from Axis Small Cap Fund and SBI Small Cap Fund, the other two are ICICI Prudential Smallcap Fund and Kotak Small Cap Fund.

The SIP outperformers

Fund Return 1-Year Return 3-Year Return 5-Year
ICICI Prudential Smallcap Fund 9.42 -0.19 3.56
Kotak Small Cap Fund 4.37 -1.09 4.5
SBI Small Cap Fund 9.25 5.13 11.17
Axis Small Cap Fund 25.11 11.13 11.63
Smallcap fund average -3.88 -3.81 3.01
SIPs made on the 1st of every month     Returns more than 1 year are expressed in CAGR %

Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any mutual fund.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on kumarsroy@rupeeiq.com