Fund Review: HDFC Small Cap Fund Growth

Who Should Invest in HDFC Small Cap Fund?

HDFC Small Cap Fund is best suitable for investors who have:

• High-risk appetite, for it being a small-cap fund.
• Long-term investment horizon of around 5 years or above.
• High-risk tolerance in the short-term horizon.
• The objective of wealth building.

Fact Sheet: HDFC Small Cap Fund (G)

Analysis: HDFC Small-cap

Returns

Return performance of HDFC Small Cap Fund is measured using trailing returns as well as the rolling returns of the scheme, where every three-year rolling returns are taken with a gap of 6 months. However, the average trailing return since launch has been analyzed along with last 3 years and 5 years data.

1. In the case of trailing returns, HDFC Small Cap Fund has given an average return of 15.60% on an average, whereas the five and three years returns are 26.11 and 18.77%, respectively as on August 23, 2018. This clearly shows that although the fund couldn’t beat its category’s average in the last 5 years, it is giving exceptional returns in the current scenario beating its category in past 3 years with a good margin.
2. Considering the rolling returns of the scheme, the fund couldn’t perform well in the cycle from 2013 to 2016, however, afterwards, HDFC Small Cap has given category beating every time, thus shown consistency.

 

Risk Analysis

The risk management of the fund is checked using the four important parameters, i.e., the ratio of volatility, maximum negative fall, fund’s performance in negative and positive market cycle, and risk to reward. Going with the data mentioned in the table below, it’s justified that:

1. The SD and Beta of the fund, as well as the category, are both equal in terms of volatility.
2. Maximum Drawdown which depicts the maximum fall in the negative cycle in past 3 years is -18.11% which is little less than that of its category. During the positive market cycle, the fund has given better returns than its category, whereas during the negative market cycle, the fund has gone less negative than its category.
3.  Lastly, the Risk-to-Reward Ratio or Sharpe Ratio of the fund is 1.03 which indicates that the risk is less as compared to the category and even the returns are better.

These are all the signs of strong fund management done by Mr. Chirag Setalvad and Mr. Rakesh Vyas.

Portfolio Allocation

Market Cap

 

At present, the scheme has the maximum investment in small and mid-cap stocks, i.e., 63.35% and 32.52%, resp., and the rest 3.76% in large cap companies. The fund managers follow a growth style of investing but also have focus on market valuation. The overall allocation is quite balanced where small cap has 63.35%, mid cap has 32.52%, and the rest is in large cap, micro, and tiny companies.

Sector Allocation

On seeing the investment, it is clear that the fund managers are taking contrarian calls by investing a big amount in IT and Pharma which have low-value stocks. Along with that, growth-related sectors are chosen for investment which includes sectors such as engineering, chemical, banking, and finance as the major ones.

Fundamental Analysis

Coming to the earnings ratio of the portfolio, the fund has an ROE of 12% which is quite good, however, the net profit margins and the sales growth are less which are 6.3 and 7 percent, resp., as compared to the others in the category.

The valuations seem enticing as in this market phase where small and mid cap stocks are trading at a high price, the fund has stocks which are trading at an attractive valuation. The P/BV and P/E ratio is 3.39 and 24, resp., which are both less than the others in the category. This makes the HDFC Small Cap less risky than others on our recommendations list.

SIP and Lumpsum Investment in HDFC Smallcap Fund Growth

SIP Investment:

The cumulative SIP investment of Rs. 36,000 initiated 3 years before would have become Rs. 53,083 providing the absolute return of 47.45%.

Lumpsum Investment:

Lumpsum investment of Rs. 100,000 for the same duration would have grown to Rs. 174286 offering the absolute return of 74.29%.

Experts’ Take: What Should You Do?

Considering the fund’s performance in the recent time, it is quite good as compared to others in the category, which is not just exceeding its benchmark but category as well.

Seeing the current portfolio of the fund, it can be evaluated that the investment is made in value stocks who are showing good performance now. On the top of that, good fund management gives us a hope that the same performance can be expected from the fund in the future as well.

Thus, experts at MySIPonline suggest that investors who follow an aggressive style, have long-investment tenure, and high-risk tolerance can prefer investing in this fund. Also, the ones who can bet on the contrarian strategy of the fund managers can include this fund in their investment portfolio.

Also Read:

Know all about the top performing small cap funds. Click on the video and pick the best one for yourself.

Also, we have shared a detailed write-up on L&T Emerging Businesses Fund (G) which is another best small cap fund of the category. Willing to know more about it, Read: Fund Review:L&T Emerging Businesses Fund 

You can even watch our expert’s analysis on SBI Small Cap Fund (G) and Reliance Small Cap Fund (G) here:

SBI Small Cap Fund video

Reliance Small Cap Fund video

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