Mutual Funds

Why this could be a good time to book profit in DSP Small Cap Fund

Yoganand D | Updated on April 10, 2021

Investors could take some gains off the table and wait for better entry points

Investors can consider booking profit in DSP Small Cap Fund to take advantage of the over 100 per cent gain in the last one-year period. Even though the fund appears to have done well in the last twelve months, which coincides with the sharp rally after markets crashed on Covid concerns last year, DSP Small Cap has under-performed or just met its benchmark return in 1-, 3- and 5-year periods besides delivering below-category average return for these periods.

Small-cap stocks are no longer cheap by any yardstick, with the S&P BSE SmallCap on a price-to-book basis trading at an over 30 per cent premium to nine-year average of 2.1 times. In this backdrop, it is advisable that investors take some gains off the table and wait for better entry points.

 

Performance

Valuations are rich for large-, mid- and small-cap stocks. While taking the fund route to invest in small-cap stocks is a less risky strategy, staying invested after a period of superlative performance only makes sense if there is conviction that such high returns will sustain.

In line with the other small-cap funds, DSP Small Cap has gained 101 per cent over the past one year period but this is lower than the category average return of 105 per cent. The same holds true for the fund’s three-year gain of 7.6 per cent and five-year gain of 14.7 per cent when compared to the three-year small-cap category average return of 8.4 per cent and five-year category average return of 15.5 per cent, respectively.

In terms of alpha, which is a better measure of actively managed fund performance, DSP Small Cap, even after doubling its NAV in one year, has under-performed the S&P BSE Small Cap Total Return Index by close to 15 percentage points. In the three-year period, the fund has barely managed to match benchmark return while under-performing by 134 basis points (bps) in the five-year period. In contrast, the average alpha generated by small-cap fund peers in three- and five-year periods stands at 434 bps and 194 bps. The only time frame where the DSP Small Cap appears to be better placed than peers and benchmark is the 10-year period where it has comprehensively outperformed.

Following strong performance between 2014 and 2016, the DSP fund was an underperformer in 2017, and in 2018 it slumped 25 per cent against the category average decline of 18.6 per cent. After a lacklustre 2019, DSP Small Cap managed to marginally outpace the category average returns of 30.4 per cent by delivering 33 per cent in the year 2020.

Portfolio

According to the February data, the fund has about 95.4 per cent exposure in equity, with small-cap stocks getting 77 per cent of the allocation while 18 per cent is invested in mid-cap stocks. The balance 4.5 per cent is parked in debt.

Pharma was the top preferred sector choice along with Industrial Products in July 2020 with 12.4 per cent allocation, but the fund has progressively reduced its exposure to 4.3 per cent in the defensive sector. On the other hand, it has gradually increased the allocation to auto ancillary and ferrous metal sectors.

The fund’s sectoral positioning is largely biased towards cyclicals. DSP Small Cap’s top stock holdings such as Atul, Ratnamani Metals & Tubes, Tube Investments of India and Nilkamal, have delivered good returns over the past one year.

The fund is overweight on chemicals, automobile, textiles and metals sectors. It is underweight on construction, financial, engineering and FMCG sectors vis-a-vis small-cap category.

Published on April 10, 2021

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