DSP BlackRock Micro Cap Fund: BUY

Want a slice of the small-cap action? Pick up units of DSP BlackRock Micro Cap fund.

It invests at least 65 per cent of its portfolio in stocks beyond the top 300 shares by market capitalisation. That means the target is stocks below the ₹3,500-crore market cap currently.

DSPBR Micro Cap is among the few funds truly dedicated to small-cap stocks. During market upswings, the fund does spectacularly well, racing far ahead of its benchmark.

Take the 2009-10 bull market, for instance. DSPBR Microcap’s returns were 337 per cent compared with the BSE Small-Cap index’s 285 per cent. The mid-and-small-cap fund category averaged 225 per cent.

Taking the fund route to investing in small-cap stocks is also a less risky strategy than directly buying such stocks. With markets looking set to embark on a good rally now, it is quite a favourable time to invest in the fund to lift portfolio returns.

Starting out as a close-ended fund in 2007, DSPBR Micro has charted a good track record. In the rally so far, the fund’s NAV has doubled. The BSE Small-Cap index’s gain was much lower, at 88 per cent. The mid-and small-cap category average stood at 78 per cent.

But in declining markets, though DSPBR Micro outsmarts its benchmark, it falls more than the category.

This is attributable to its marked small-cap focus; not only do mid-cap stocks fall lower but mid-cap funds can also move a larger part of their portfolio into stable blue-chips.

The BSE Small-Cap index, for example, dropped 50 per cent in the 2011 down-trending market against the BSE Mid-Cap index’s 41 per cent.

Though it can inject life into portfolio returns, the volatile nature of small-caps makes DSPBR Micro strictly for high-risk investors. The fund reduces risk of sudden stock movements by holding a large number of stocks. The top 10 stocks don’t normally go over 45 per cent of the portfolio. The fund also moves into cash and debt to mitigate the impact of slides.

In the 2008-09 fall, for example, equity holdings hovered around 70 per cent. Similarly, in 2012, the fund moved to almost 98-99 per cent in equity holdings. Capital goods stocks were a preferred sector over the years, at about 11 to 15 per cent of the portfolio from mid-2010 onwards. Finance stocks make up the most holding in the June 2014 portfolio, mostly through stocking up of IDFC. Holding in SKS Microfinance has also been raised.

Recent portfolio additions include tyre stocks such as Ceat, construction company KNR Constructions and plastics company Finolex Industries.

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