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The going has not just been good. It has been extraordinary for the BSE Small Cap Index and the funds that invest in such stocks over the past one year.
There are four funds that have benchmarked themselves against the BSE Small Cap index — DSP BR Micro-Cap, Reliance Small Cap, SBI Small & Midcap and Sundaram S.M.I.L.E.
In the last one year, these funds generated 80-122 per cent returns. Except SBI Small & Midcap, which underperformed the benchmark, the other three funds have beaten the index convincingly.
Reliance Small Cap has increased its allocation in the chemicals, financial and automobile sectors. On the other hand, it reduced allocations in the construction, engineering and services sectors. LG Balakrishnan, Atul, TVS Motor and Honeywell Automation are a few stocks that have made big rallies over the last one-year period in Reliance Small Cap.
But SBI Small & Midcap is overweight in healthcare, automobile and communication sectors than the index and underweight in sectors such as financials, FMCG and services. This could have limited the fund’s performance over the one-year period. Sundaram S.M.I.L.E. and DSP BlackRock Micro Cap have considerable exposure to engineering and automobile sectors.
Index trendsThe long-term downtrend of BSE Small Cap index came to a halt after taking support in the band between 5,000 and 5,200 in August and September 2013. Since then, the stock has been on a long-term uptrend which is exactly like the rally that happened in 2009 and 2010.
The index decisively broke out of a significant long-term resistance around 7,700 in May 2014 and continued its uptrend. The medium-term trend is also up for the index. However, the index encountered a key long-term resistance around 11,366 (November 2010 peak) this September and started to move sideways.
Technically, there won’t be any threat to the long-term uptrend as far as the index trades above 9,000 levels. A fall below this level will diminish the bullish momentum and pull the index down to the significant long-term support zone between 8,000 and 8,200.
An emphatic breakthrough of the key long-term resistance at 11,366 can accelerate the index northwards to 12,200 and then to 14,000 in the long term. In the short term, the index will remain moving in the range between 10,300 and 11,366. Given the uptrend, a tiny portion of an investor’s portfolio can be parked in small-cap funds.
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