Franklin India Smaller Companies: BUY

Despite the stellar rally in mid- and small-cap stocks in the last one year, pockets of opportunity still exist. A gradual pick-up in economic activity and moderation in interest rates over the next three-five years may augur well for small- and mid-cap stocks.

Given the higher risk associated with investing in such stocks, it may be prudent to prefer funds with a healthy performance track record.

The Franklin India Smaller Companies Fund is one such. The scheme has not only bettered its benchmark, CNX Midcap, over one-, three- and five-year time periods, but has also outdone peers such as Birla Sun Life Small and Midcap, DSP Black Rock Small and Midcap and IDFC Premier Equity across time frames. Investors with a reasonably high risk appetite and a three-to-five-year horizon can consider investment in the fund.

The fund scores high on consistency too — its annual returns in the last five years have been higher than the CNX Midcap index over 80 per cent of the time.

The flexibility to invest in companies down the market cap curve, though risky, has benefited performance during rallies.

The fund’s NAV has risen by about 91 per cent in the last one year, 32 percentage points more than the CNX Midcap Index. Stocks are generally well chosen.

For instance, investment in the stock of KEC International came as a shot in the arm for the fund; the stock price has jumped five-fold since August 2013.

Other stocks in the small-cap space that boosted the fund’s performance include cement producer JK Lakshmi Cement (274 per cent) and Finolex Cables (249 per cent).

Investment in air-conditioner and refrigerator maker Voltas also fetched tidy gains (225 per cent) for the fund.

In the last one year, the fund has reduced exposure to auto and pharma stocks. After reducing exposure to banks in August last year, it has turned buyer in banking stocks.

However, it has trimmed its holdings in non-banking financial company stocks.

In addition to banks, the fund has been adding stocks in cyclical themes, such as industrial products, cement, power and oil and gas to its portfolio. A well-diversified portfolio of 57 stocks with a weighted average market capitalisation of about ₹9,800 crore minimises concentration risk. Finolex Cables, which is the scheme’s top holding, accounts for just 3.6 per cent of the total assets.

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