Small cap is a term used to classify companies with a relatively small market capitalization as compared to large caps and midcaps.

Today, we compare two small cap schemes which have performed exceedingly well and has provided investors with handsome returns.

This comparison will help investors make informed choices about their investment.

Let’s have a closer look.

1.Objective of the Investment

HDFC Small Cap Fund

The investment objective of the scheme is to generate long-term capital through a well-managed portfolio of equity and equity-related securities, which includes equity derivatives.

L&T Emerging Businesses Fund

Emerging companies are businesses which are typically in the early stage of development and have the potential to grow their revenues and profit at a higher rate as compared to the broader market.

The investment objective of this fund is to generate long-term capital appreciation from a diversified portfolio of predominantly equity and equity-related securities, including equity derivatives in the Indian market, with a key theme focus being emerging companies (small cap stocks).

The scheme could also additionally invest in foreign securities.

2.Key Details

ParticularsHDFC Small CapL&T Emerging Businesses Fund
Fund HouseHDFC Mutual FundL&T Mutual Fund
SchemeOpen EndedOpen Ended
ClassEquityEquity
Scheme BenchmarkNIFTY Smallcap 100 TRINIFTY Smallcap 250 TRI
CategoryEquity: Small CapEquity: Small Cap
Inception Date01/01/201312/05/2014
NAV (Rs./Unit)47.7 (As of 12th September, 2018)27.3
Total Fund Size (In Rs. Crores)4,143 crores4,934 crores
Fund ManagerChirag Setalvad, Rakesh VyasSoumendra Nath Lahiri, Karan Desai
Availability of SIPYesYes
Minimum Initial Investment5,0005,000
Expense Ratio0.49%1.60%
RiskModerately HighHigh
Beta0.800.86
Standard Deviation17.0618.31
Sharpe Ratio0.940.91
OptionsGrowthGrowth
CEOMilind BarveKailash Kulkarni
Exit LoadIf redeemed bet. 0 Year to 1 Year; Exit Load is 1%If redeemed bet. 0 Year to 1 Year; Exit Load is 1%

3.Investment Strategy

As both HDFC Small Cap Fund and L&T Emerging Businesses Fund belong to the small cap category, they carry with them the quality of high risk and high return.

Both the schemes aim for long-term capital appreciation for its trusting investors by careful analysis of both the fundamentals of the companies as well as the macroeconomic factors driving the sector.

The asset allocation for the schemes has been shown below:

SchemesLarge CapMid CapSmall Cap
HDFC Small Cap Fund3.4%51.2%26.7%
L&T Emerging Businesses Fund2.2%58.8%27.4%

HDFC Small Cap Fund under normal circumstances invests:

  • 80% – 100% allocation to small-cap and mid-cap companies;
  • 0% – 20% to other market instruments

The investment process followed by L&T mutual fund is proprietary in nature and is called GEM. The investments are based on a foundation of in-depth research and fundamental analysis.

Three important steps followed in the proprietary investment process are :

1.Generation of Ideas,

2.Evaluation of companies

3.Manufacturing & monitoring of portfolios.

4.Portfolio and Sector Allocation (Top 10 Holdings)

HDFC Small Cap Fund

Name% of AssetsSectorInstrumentRating/ Size
CBLO (CCIL)16%Current AssetsMoney Market
NIIT Technologies3.5%ITEquityMid Cap
Aurobindo Pharma Ltd.3.4%PharmaEquityLarge Cap
First Source Solutions Ltd.3.4%ITEquityMid Cap
Sharda Cropchem Ltd.3.3%Fertilizers & PesticidesEquityMid Cap
SKF India Ltd.2.9%Industrial ManufacturingEquityMid Cap
Sonata Software Ltd.2.7%ITEquityMid Cap
Chambal Fertilizers & Chemicals Ltd.2.6%Fertilizers & PesticidesEquityMid Cap
Indian Bank2.5%Financial ServicesEquityMid Cap
Vardhman Textiles Ltd.2.4%TextilesEquityMid Cap

Current top 5 equity sector allocation

Sector AllocationCurrent % NAV
Industrial Manufacturing18.5%
IT13.6%
Financial Services9.5%
Services9.4%
Fertilizers & Pesticides8.5%

L&T Emerging Businesses Fund

Name% of AssetsSectorInstrumentRating/ Size
CBLO (CCIL)6.7%Current AssetsMoney Market
HEG Ltd.3.3%Industrial ManufacturingEquityMid Cap
Lakshmi Machine Works Ltd.3.0%Industrial ManufacturingEquityMid Cap
The Ramco Cements Ltd.2.6%Cement & Cement ProductsEquityMid Cap
Future Retail Ltd.2.2%Consumer GoodsEquityLarge Cap
CARE Ratings Ltd.2.1%Financial ServicesEquityMid Cap
IPCA Laboratories Ltd.2.1%PharmaEquityMid Cap
Bharat Financial Inclusion Ltd.2.0%Financial ServicesEquityMid Cap
Future Supply Chain Solutions Ltd.2.0%ServicesEquitySmall Cap
Grindwell Norton Ltd.1.9%Industrial ManufacturingEquityMid Cap

Current top 5 equity sector allocation

Sector AllocationCurrent % NAV
Industrial Manufacturing24.9%
Financial Services14.6%
Consumer Goods9.2%
Automobile8.8%
Chemicals8.3%

5. Returns

Returns1-Year3-Years5-Years
HDFC Small Cap23.4%25.0%NA
L&T Emerging Businesses Fund8.9%25.8%NA

 6. Benchmark

HDFC Small Cap Fund

Returns1-Year3-Years5-Years
HDFC Small Cap23.4%25.0%NA
NIFTY Smallcap 100 TRI-3.89%15.41%

L&T Emerging Businesses Fund

Returns1-Year3-Years5-Years
L&T Emerging Businesses Fund8.9%25.8%NA
NIFTY Smallcap 250 TRI-3.31%14.58%

7) Fund Manager 

HDFC Small Cap Fund

This fund is managed by Mr. Chirag Setalvad and Rakesh Vyas, both of whom are experienced in the industry.

1.Chirag Setalvad

Mr. Setalvad has an extensive experience in fund management, equity research, and investment banking.

He is the Senior Fund Manager of Equities at HDFC Asset Management Company Limited.

Education

Mr. Setalvad has completed Bachelor of Science and then an MBA from University of North Carolina.

Experience

Prior to joining HDFC AMC, he has worked with New Vernon Advisory Services Ltd., HDFC AMC and ING Barings N.V.

Top funds managed by Mr. Chirag Setalvad are:

  • HDFC Long-term Advantage Fund
  • HDFC Children’s Gift Fund – since Apr 2007
  • HDFC Mid-Cap Opportunities Fund – since May 2007
  • HDFC Hybrid Equity Fund

2. Rakesh Vyas

Rakesh Vyas is a dedicated fund manager for overseas industry. He has an overall experience of 14 years and has been in the equity research space for the last 11 years.

Education

Mr. Vyas is an alumnus of XLRI Jamshedpur, having completed his Post-Graduate Diploma from there.

Experience

Previously, Mr. Vyas has worked as a Research Analyst and Associate at Nomura Securities Co. Ltd., Lehman Brothers Holdings Inc. and Barclays Capital

Emerging Businesses Fund

Soumendra Nath Lahiri

Mr. Soumendra Nath Lahiri has an experience of over 27 years in managing equity and equity related instruments and serves as Chief Investment Officer of Investment Management at L&T Finance Holdings Ltd.

Education

Mr. Lahiri is a B.Tech and PGDM from IIM Bangalore.

Experience

Prior to joining L&T Mutual Fund, he has worked with Canara Robeco AMC Co. Ltd., Emkay Investment Managers Ltd, Fortuna Capital and DSP Black Rock Investment Managers Pvt. Ltd.

Top funds managed by Mr. S.N. Lahiri are:

  • L&T Midcap Fund-Growth
  • L&T Infrastructure Fund – Direct – Growth
  • L&T Hybrid Equity – Direct – Growth

Karan Desai

Mr. Karan Desai has an experience of more than 11 years for investment in foreign securities.

Education

Mr. Desai has done B.Com from Mumbai University and M.Sc. Investments from University of Birmingham.

Experience

Prior to this, he was working with L&T Investment Management and HNI.

Top funds managed by Mr. Karan Desai are:

  • L&T Equity Fund – Growth
  • L&T India Large Cap Fund – Growth
  • L&T India Value Fund – Growth
  • L&T Large and Midcap Fund – Growth

What are your other options?

Reliance Small Cap – Direct – Growth

The target of this scheme is to invest mainly in equity and equity-related derivatives of small-cap companies. The secondary objective is to generate consistent returns by investing in debt and money market securities.

Launch Date01/10/2013
Fund CategoryEquity- Small Cap
Assets Under Management (AUM)6,696 crores
Scheme TypeOpen Ended
Scheme BenchmarkNIFTY Smallcap 250 TRI
Fund ManagerSamir Rachh, Dhrumil Shah
Expense Ratio1.16%
Riskometer Moderately High
Fund HouseReliance Mutual Fund

The NAV of the fund as on 10.09.2018 is 46.6 and historical returns of the fund have been given below:

Time DurationReturns
1-Year13.1%
3-Year24.1%
5-Year39.3%

SBI Small Cap – Direct – Growth

This scheme aims at generating long-term capital appreciation and income by investing in a portfolio of primarily equity and equity related securities of companies who are identified as industry leaders.

Launch Date02/01/2013
Fund CategoryEquity- Small Cap
Assets Under Management (AUM)792 crores
Scheme TypeOpen Ended
Scheme BenchmarkNIFTY Smallcap 250 TRI
Fund ManagerRama Iyer Srinivasan
Expense Ratio1.29%
Riskometer Moderately High
Fund HouseSBI Mutual Fund

The NAV of the fund as on 10.09.2018 is 58.9 and historical returns of the fund have been given below:-

Time DurationReturns
1-Year16.3%
3-Year23.6%
5-YearNA

Franklin India Smaller Companies Fund

This scheme invests in equity and equity related securities of companies that are identified as market leaders. The scheme aims at long-term wealth aooreciation.

Launch Date01/01/2013
Fund CategoryEquity- Small Cap
Assets Under Management (AUM)7,497 crores
Scheme TypeOpen Ended
Scheme BenchmarkNIFTY Smallcap 250 TRI
Fund ManagerR Janakiraman, Srikesh Nair
Expense Ratio1.01%
Riskometer Moderately High
Fund HouseFranklin Templeton Mutual Fund

The NAV of the fund as on 10.09.2018 is 60.4 and historical returns of the fund have been given below:

Time DurationReturns
1-Year7.4%
3-Year16.5%
5-Year33.2%

Conclusion

Small cap funds offer twin advantage, which is, it offers high growth prospects and relatively lower valuation.

One should be aware of the risk that comes with investing in small cap funds. While these funds have the potential of generating supernormal returns, they can also go haywire during times of market volatility.

Both these funds i.e (HDFC Small Cap Fund and L&T Emerging Businesses Fund) have been successful in creating wealth for its long-term investors.

Therefore, it is best suited for investors looking for high capital appreciation over a long-term period. And it is always best for beginners to enter the markets via a Systematic Investment Plan (SIP).

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Grow