If you are looking for a fund that invests in small-cap stocks, DSP BlackRock Microcap Fund makes a good choice. While most multicap funds do invest in small-cap stocks, the exposure is limited.

The Microcap fund, on the contrary, offers a dedicated exposure to the small-cap theme. Impressive track record of performance, well-diversified portfolio and ability to ride market rallies add to its investment charm.

Besides, taking the MF route to investing in this relatively under-owned and sometimes under-researched market-cap segment would provide some cushion from the potential minefields and risks.

Suitability

DSP BlackRock Microcap Fund is suitable only for investors who can stomach the high volatility that comes bundled with small-cap investing. The fund seeks to invest 65-100 per cent of its assets in stocks that are not part of the top 300 companies by market capitalisation.

Its investment universe, therefore, would be made up predominantly of stocks with market cap of less than Rs 2,500 crore (at present). This makes the fund susceptible to volatility and liquidity of the stocks in concern, making it suitable only for aggressive investors.

Investors, therefore, may be better off going for a systematic investment plan for the fund instead of lump-sum investing.

Performance : DSP BR Microcap Fund has delivered a compounded return of about 6.6 per cent and 51.8 per cent over a one- and three-year period, bettering its benchmark BSE Small Cap Index by a huge margin. The fund has also delivered better than the mid- and small-cap fund category average during the time frames.

In the last one year, though the fund did not put in a top-of-the-charts performance, its returns found it place in the top quartile in its category.

Over a three-year period, its returns make it a close second to Magnum Emerging Businesses Fund.

Notably, the fund has outpaced some established peers over both the time frames. For instance, ICICI Pru Discovery returned 5.3 per cent and 47 per cent, while Sundaram Select Midcap delivered 4 per cent and 42 per cent, respectively, over a one- and three-year period.

What's more, the microcap fund's return compares quite favourably with the diversified category too.

The fund's performance during market rallies has been really impressive. In 2009 and 2010, it returned about 116 per cent and 44 per cent, respectively, beating a good majority of its peers by a huge margin.

It, however, doesn't sport that impressive a track record during market corrections. For instance, in 2008, the fund's NAV slid by about 63 per cent, more than the category average of closed-end (62.5 per cent) and open-end funds (60 per cent). Notably, this was despite the fund making aggressive cash and debt calls.

Note that the fund had started out as a closed end fund in June 2007. It went open-ended in June 2010 only.

Managing a small-cap fund in volatile markets is difficult, and the fund's returns in 2011 reflect it. It lost about 27 per cent, about 2 percentage points higher than its category.

But that is only to be expected in a fund laden with small-cap stocks that can swing sharply when markets change course.

Portfolio: The fund, sticking to its mandate, holds about 67 per cent of its investments in stocks with less than Rs 2,500-crore market capitalisation.

Except Allahabad Bank and Karur Vysya Bank, the rest of its portfolio is in the sub Rs 4,000-crore market cap segment.

The fund's portfolio is actively managed, with nearly half the number of stocks in its portfolio being replaced in the last one year.

Over the year, it made exits in stock such as TTK Prestige, Sundaram Finance, and GIC Housing Finance. Solar Industries, Dewan Housing Finance, PTC India and Fresenius Kabi Oncology are the latest additions to its portfolio.

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