I’ve always had this strange inclination towards small-cap funds. The reason is simple. I like to follow not just the numbers but also the very nature of these funds or any other fund. We need to understand the nature of a stock that is termed a small cap. Will they forever want to remain small caps? No! Will they want to climb up the ladder towards being a large cap? Yes! Then should I invest for the long term in the small-cap stocks? Any sane mind would say Yes! But how do we identify good small-cap stocks?
I realized that identifying and investing into small-cap stocks or any stocks as a matter of fact is not the end of our efforts. The real effort is required to monitor the stock and its news. Had it been Reliance, I wouldn’t have bothered to look at it. But if it is a small-cap stock, would I still be so relaxed? I am no research analyst having all the tools and expertise! Hence, I’ve always liked investing in small-cap funds and let the fund manager do his job. Below is a detailed analysis of the HDFC Small-Cap Fund. I’ve made this analysis using the help of AI. So reader’s discretion is advised.
Investing in small-cap funds can be a rewarding yet challenging endeavor. Small-cap companies, typically with a market capitalization below ₹5,000 Crores, offer high growth potential but come with higher risks due to their volatility and lower liquidity. One of the prominent players in this space is the HDFC Small Cap Fund, managed by HDFC Mutual Fund. In this blog, we’ll dive deep into the fund’s performance, portfolio, risk factors, and suitability for investors.
1. Fund Overview
What is HDFC Small Cap Fund?
The HDFC Small Cap Fund is an open-ended equity mutual fund that primarily invests in small-cap companies. The fund aims to provide long-term capital appreciation by focusing on companies that have the potential to grow significantly over time.
- Category: Small Cap Fund
- Investment Objective: To generate long-term capital appreciation by investing predominantly in small-cap companies.
- Fund Manager: Chirag Setalvad (since June 28, 2014)
- Total Experience: Over 26 years
- Inception Date: April 3, 2008
- Assets Under Management (AUM):
- As of February 29, 2024: ₹28,598.92 Crores
- Average for February 2024: ₹28,679.20 Crores
- Expense Ratio:
- Regular Plan: 1.60%
- Direct Plan: 0.61%
- Benchmark: S&P BSE 250 SmallCap (Total Returns Index)
- Additional Benchmark: NIFTY 50 (Total Returns Index)
2. Portfolio Composition
Top 10 Holdings
The fund’s portfolio is well-diversified across sectors, with a focus on small-cap companies. Here are the top 10 holdings as of February 29, 2024:
| Company | Sector | % of NAV |
|---|---|---|
| Sonata Software Ltd. | IT – Software | 5.28% |
| Firstsource Solutions Ltd. | Commercial Services & Supplies | 4.09% |
| Bank of Baroda | Banks | 3.98% |
| eClerx Services Limited | Commercial Services & Supplies | 3.11% |
| Aster DM Healthcare Limited | Healthcare Services | 2.91% |
| Great Eastern Shipping Company Ltd. | Transport Services | 2.25% |
| Equitas Small Finance Bank Ltd | Banks | 2.11% |
| Power Mech Projects Ltd. | Construction | 2.08% |
| Bajaj Electricals Ltd. | Consumer Durables | 2.05% |
| IDFC Ltd. | Finance | 1.97% |
Sector Allocation
The fund’s equity holdings are spread across various sectors, with a significant focus on Banks, Transport Services, and Auto Components.
| Sector | % of Net Assets |
|---|---|
| Banks | 23.61% |
| Transport Services | 5.34% |
| Agricultural, Commercial & Construction Vehicles | 5.35% |
| Industrial Products | 6.02% |
| Retailing | 6.38% |
| Transport Infrastructure | 7.31% |
| Auto Components | 44.15% |
3. Performance Analysis
SIP Performance (Regular Plan – Growth Option)
Systematic Investment Plans (SIPs) are a great way to invest in mutual funds. Here’s how the HDFC Small Cap Fund has performed over different time periods:
| Period | Total Amount Invested (₹) | Market Value (₹) | Returns (%) |
|---|---|---|---|
| Since Inception | ₹19.10 Lacs | ₹110.06 Lacs | 19.61% |
| 15 Years | ₹18.00 Lacs | ₹93.23 Lacs | 19.72% |
| 10 Years | ₹12.00 Lacs | ₹37.89 Lacs | 21.77% |
| 5 Years | ₹6.00 Lacs | ₹13.38 Lacs | 32.77% |
| 3 Years | ₹3.60 Lacs | ₹5.66 Lacs | 31.75% |
| 1 Year | ₹1.20 Lacs | ₹1.49 Lacs | 47.29% |
Lump-Sum Performance
If you had invested ₹10,000 in the fund, here’s how it would have grown over time:
| Period | Scheme Return (%) | Benchmark Return (%) | Additional Benchmark Return (%) | Value of ₹10,000 Invested |
|---|---|---|---|---|
| Last 1 Year | 53.14% | 63.32% | 28.40% | ₹15,332 (Scheme) |
| Last 3 Years | 32.03% | 29.37% | 16.12% | ₹23,066 (Scheme) |
| Last 5 Years | 24.19% | 25.26% | 16.64% | ₹29,579 (Scheme) |
| Last 10 Years | 21.75% | 19.72% | 14.73% | ₹71,658 (Scheme) |
| Since Inception | 16.94% | 11.35% | 11.39% | ₹120,687 (Scheme) |
4. Risk Analysis
Key Risk Metrics
- Standard Deviation: 15.272% (Indicates higher volatility compared to the market)
- Beta: 0.855 (Indicates the fund is less volatile than the market)
- Sharpe Ratio: 1.474 (Indicates good risk-adjusted returns)
What Do These Metrics Mean?
- Standard Deviation: The fund’s returns can fluctuate significantly, which is typical for small-cap funds.
- Beta: The fund is less volatile than the market, meaning it may not move as sharply as the broader market.
- Sharpe Ratio: The fund has delivered good returns relative to the risk taken.
5. Exit Load
- Exit Load:
- 1.00% if units are redeemed/switched out within 1 year from the date of allotment.
- No Exit Load if units are redeemed/switched out after 1 year from the date of allotment.
6. Who Should Invest?
Suitability
- Investor Profile: Suitable for investors with a high-risk appetite and a long-term investment horizon (5-7 years or more).
- Investment Horizon: Long-term (5 years or more)
- Risk Appetite: High
Why Invest in HDFC Small Cap Fund?
- High Growth Potential: Small-cap companies have the potential to deliver significant returns over the long term.
- Experienced Fund Manager: Chirag Setalvad has over 26 years of experience and a proven track record.
- Diversified Portfolio: The fund invests across various sectors, reducing concentration risk.
7. Risks to Consider
- High Volatility: Small-cap funds are more volatile than large-cap or mid-cap funds.
- Liquidity Risk: Small-cap stocks may not be as liquid, making it harder to buy or sell large quantities without impacting the price.
- Market Risk: Small-cap stocks are more sensitive to market fluctuations.
8. Conclusion
The HDFC Small Cap Fund is a strong contender for investors looking to capitalize on the growth potential of small-cap companies. With a seasoned fund manager, a diversified portfolio, and a solid track record, the fund has delivered consistent returns over the long term. However, investors should be prepared for higher volatility and should only invest if they have a long-term horizon and a high-risk tolerance.
Key Takeaways
- Strengths: Strong historical performance, experienced management, and a diversified portfolio.
- Risks: High volatility, liquidity risk, and market sensitivity.
- Recommendation: Ideal for long-term investors with a high-risk appetite.
Source of Data
All data and performance metrics are sourced from the HDFC Mutual Fund Factsheet for February 2024. The fact sheet provides detailed information on the fund’s portfolio, performance, and risk metrics.
Investing in small-cap funds like the HDFC Small Cap Fund can be a rewarding journey, but it’s essential to stay informed and understand the risks involved. If you’re ready to take on the challenge, this fund could be a valuable addition to your portfolio.
Disclaimer: Mutual fund investments are subject to market risks. Please read the scheme-related documents carefully before investing. Past performance is not indicative of future returns.
