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.
In this article
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
| Particulars | HDFC Small Cap | L&T Emerging Businesses Fund |
| Fund House | HDFC Mutual Fund | L&T Mutual Fund |
| Scheme | Open Ended | Open Ended |
| Class | Equity | Equity |
| Scheme Benchmark | NIFTY Smallcap 100 TRI | NIFTY Smallcap 250 TRI |
| Category | Equity: Small Cap | Equity: Small Cap |
| Inception Date | 01/01/2013 | 12/05/2014 |
| NAV (Rs./Unit) | 47.7 (As of 12th September, 2018) | 27.3 |
| Total Fund Size (In Rs. Crores) | 4,143 crores | 4,934 crores |
| Fund Manager | Chirag Setalvad, Rakesh Vyas | Soumendra Nath Lahiri, Karan Desai |
| Availability of SIP | Yes | Yes |
| Minimum Initial Investment | 5,000 | 5,000 |
| Expense Ratio | 0.49% | 1.60% |
| Risk | Moderately High | High |
| Beta | 0.80 | 0.86 |
| Standard Deviation | 17.06 | 18.31 |
| Sharpe Ratio | 0.94 | 0.91 |
| Options | Growth | Growth |
| CEO | Milind Barve | Kailash Kulkarni |
| Exit Load | If 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:
| Schemes | Large Cap | Mid Cap | Small Cap |
| HDFC Small Cap Fund | 3.4% | 51.2% | 26.7% |
| L&T Emerging Businesses Fund | 2.2% | 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 Assets | Sector | Instrument | Rating/ Size |
| CBLO (CCIL) | 16% | Current Assets | Money Market | – |
| NIIT Technologies | 3.5% | IT | Equity | Mid Cap |
| Aurobindo Pharma Ltd. | 3.4% | Pharma | Equity | Large Cap |
| First Source Solutions Ltd. | 3.4% | IT | Equity | Mid Cap |
| Sharda Cropchem Ltd. | 3.3% | Fertilizers & Pesticides | Equity | Mid Cap |
| SKF India Ltd. | 2.9% | Industrial Manufacturing | Equity | Mid Cap |
| Sonata Software Ltd. | 2.7% | IT | Equity | Mid Cap |
| Chambal Fertilizers & Chemicals Ltd. | 2.6% | Fertilizers & Pesticides | Equity | Mid Cap |
| Indian Bank | 2.5% | Financial Services | Equity | Mid Cap |
| Vardhman Textiles Ltd. | 2.4% | Textiles | Equity | Mid Cap |
Current top 5 equity sector allocation
| Sector Allocation | Current % NAV |
| Industrial Manufacturing | 18.5% |
| IT | 13.6% |
| Financial Services | 9.5% |
| Services | 9.4% |
| Fertilizers & Pesticides | 8.5% |
L&T Emerging Businesses Fund
| Name | % of Assets | Sector | Instrument | Rating/ Size |
| CBLO (CCIL) | 6.7% | Current Assets | Money Market | – |
| HEG Ltd. | 3.3% | Industrial Manufacturing | Equity | Mid Cap |
| Lakshmi Machine Works Ltd. | 3.0% | Industrial Manufacturing | Equity | Mid Cap |
| The Ramco Cements Ltd. | 2.6% | Cement & Cement Products | Equity | Mid Cap |
| Future Retail Ltd. | 2.2% | Consumer Goods | Equity | Large Cap |
| CARE Ratings Ltd. | 2.1% | Financial Services | Equity | Mid Cap |
| IPCA Laboratories Ltd. | 2.1% | Pharma | Equity | Mid Cap |
| Bharat Financial Inclusion Ltd. | 2.0% | Financial Services | Equity | Mid Cap |
| Future Supply Chain Solutions Ltd. | 2.0% | Services | Equity | Small Cap |
| Grindwell Norton Ltd. | 1.9% | Industrial Manufacturing | Equity | Mid Cap |
Current top 5 equity sector allocation
| Sector Allocation | Current % NAV |
| Industrial Manufacturing | 24.9% |
| Financial Services | 14.6% |
| Consumer Goods | 9.2% |
| Automobile | 8.8% |
| Chemicals | 8.3% |
5. Returns
| Returns | 1-Year | 3-Years | 5-Years |
| HDFC Small Cap | 23.4% | 25.0% | NA |
| L&T Emerging Businesses Fund | 8.9% | 25.8% | NA |
6. Benchmark
HDFC Small Cap Fund
| Returns | 1-Year | 3-Years | 5-Years |
| HDFC Small Cap | 23.4% | 25.0% | NA |
| NIFTY Smallcap 100 TRI | -3.89% | 15.41% | – |
L&T Emerging Businesses Fund
| Returns | 1-Year | 3-Years | 5-Years |
| L&T Emerging Businesses Fund | 8.9% | 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.,
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 Date | 01/10/2013 |
| Fund Category | Equity- Small Cap |
| Assets Under Management (AUM) | 6,696 crores |
| Scheme Type | Open Ended |
| Scheme Benchmark | NIFTY Smallcap 250 TRI |
| Fund Manager | Samir Rachh, Dhrumil Shah |
| Expense Ratio | 1.16% |
| Riskometer | Moderately High |
| Fund House | Reliance 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 Duration | Returns |
| 1-Year | 13.1% |
| 3-Year | 24.1% |
| 5-Year | 39.3% |
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 Date | 02/01/2013 |
| Fund Category | Equity- Small Cap |
| Assets Under Management (AUM) | 792 crores |
| Scheme Type | Open Ended |
| Scheme Benchmark | NIFTY Smallcap 250 TRI |
| Fund Manager | Rama Iyer Srinivasan |
| Expense Ratio | 1.29% |
| Riskometer | Moderately High |
| Fund House | SBI 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 Duration | Returns |
| 1-Year | 16.3% |
| 3-Year | 23.6% |
| 5-Year | NA |
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 Date | 01/01/2013 |
| Fund Category | Equity- Small Cap |
| Assets Under Management (AUM) | 7,497 crores |
| Scheme Type | Open Ended |
| Scheme Benchmark | NIFTY Smallcap 250 TRI |
| Fund Manager | R Janakiraman, Srikesh Nair |
| Expense Ratio | 1.01% |
| Riskometer | Moderately High |
| Fund House | Franklin 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 Duration | Returns |
| 1-Year | 7.4% |
| 3-Year | 16.5% |
| 5-Year | 33.2% |
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
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