Mutual Funds

SIPs in small-cap funds disappoint big time

Parvatha Vardhini C / Dhuraivel Gunasekaran BL Research Bureau | Updated on September 16, 2019 Published on September 16, 2019

SEBI’s new norms, slowdown push 5-year return of almost 50% of funds into red zone

If you are one of those old-school investors who thought five years is a long enough time to earn good returns from your SIP investments, then you may just recoil looking at the performance of some of the small-cap funds. Data show that six out of 14 small-cap funds or nearly half the funds have seen their SIP returns erode by 0.1 per cent to 7.6 per cent in the last five years. This is unlike other categories of equity funds, where SIPs have generated positive returns in the last five years.

 

Multiple headwinds

Thanks to the market volatility in the last year, SIPs in many funds across categories – be it large-cap, large & mid-cap, mid-cap, multicap or small-cap – have reported negative returns. But move to longer terms of three and five-years, their records get better. But this is not the case with small-cap funds. While the market rally of 2017 saw the small-caps zoom, they have been pounded since then. In 2017, for instance, while the Nifty 50 TRI (Total Returns Index) gained 30.4 per cent, small-cap indices of the NSE zoomed by 55-59 per cent. In the volatile markets of 2018 and so far in 2019, the small-cap indices have lost heavily, even as the Nifty 50 managed mild gains.

Says Sachin Shah, Fund Manager, Emkay Investment Managers: “In late 2017 and in early 2018, small-cap stocks moved up quite significantly and valuations of many small companies were running ahead of time and were at a significant premium to some of the large-cap indices. This factor, along with regulatory changes such as rejig in mutual fund portfolios based on SEBI’s new scheme classification norms as well as the overall slowdown in the corporate earnings growth triggered selling pressure in small-cap stocks.”

Amidst the volatility, there are some small-cap funds that have managed to hold their head above water. SIPs in Axis Small Cap, for instance, have fetched 9.7 per cent gains in the last five years, making this fund the category topper. In fact, Axis Small cap is the only fund that has recorded positive returns over one- , three- and five-year periods. Last year’s additions to the fund’s portfolio such as Fine Organics, Can Fin Homes, Brigade Enterprises and SRF have fetched good returns.

Explaining what worked for the fund, Anupam Tiwari, Equity Fund Manager, Axis Mutual Fund, says: “The fund runs a high conviction portfolio of quality companies with a stable and scalable business model. It is important to note that quality small-caps have not seen a significant fall and were able to sail through the volatility well.”

Time to invest?

With many small-cap stocks correcting sharply, valuations too have come down. The Nifty Smallcap 250 index, for instance, trades at a PE of about 31 times its trailing earnings now, down from about 43 times in the beginning of 2019. The valuation was at 80-90 times at end-2017 and early 2018. Though the economic slowdown does not offer much near-term earnings visibility, for long-term investors, it might not be a bad time to begin investing in small- cap funds, say experts.

Says Vinit Sambre, Head- Equities, DSP Investment Managers: “On a broad basis, the small-cap category has become reasonable in terms of valuation now. If we look deeper, there is still dichotomy. While stocks in sectors such as auto ancillaries, building materials and agro chemicals are trading at a low point in terms of valuation, categories such as retail, consumer durables and consumer electrical goods are still expensive. Although the recovery may not happen immediately, there are definitely opportunities available now for long-term investors.”

Published on September 16, 2019
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