The Nifty breached the 16,000 level for the first time on August 3, 2021, marking a new market high. With the market continuing to climb up, the Nifty has gained 113 per cent and the Nifty Midcap 150, 154 per cent so far since the March 2020 low.

The surge in the small-cap indices has been higher still. Both the Nifty Smallcap 250 and the Nifty Smallcap 100 are well over 200 per cent up since last year’s March low. Whether these stocks have more steam left is anybody’s guess.

The record gains, however, call for some caution and make it a good time for investors to book profit in underperforming small-cap funds. Sundaram Small Cap Fund (erstwhile Sundaram Small and Medium Indian Leading Equities Fund), an underperformer in its category, is one such scheme. Notwithstanding long-term underperformance, the latest one-year return for the scheme is 99 per cent. Your capital gain on redemption will depend on the NAV/s at which you invested in the scheme.

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Note that if you have stayed in the scheme for only up to a year, your short-term capital gains will be taxed at your income tax slab rate.

If you are redeeming after holding for more than a year, long-term capital gains (if in excess of ₹1 lakh a year from all equity investments) will be taxed at 10 per cent.

Subpar returns

Data shows that the small-cap fund category has, on average, returned 3-year and 5-year rolling returns (CAGR) of 8.4 per cent and 8.8 per cent, respectively, over the last seven-year period. Compared to this, Sundaram Small Cap has offered 3.7 per cent and 4.4 per cent on average, respectively.

The top performers, such as SBI Small Cap, Nippon India Small Cap and Axis Small Cap, have offered 3-year and 5-year average returns (CAGR) of 12.1-15.2 per cent and 12.3-15.3 per cent respectively during the same period. Only small-cap funds that have been around for at least seven years have been considered for the analysis.

We go beyond average returns and also consider the number of times the scheme returns have been below a certain minimum level, say, 5 per cent, for instance. Over the last seven years, 3-year returns (CAGR) for Sundaram Small Cap have been below 5 per cent, 56 per cent of the time, compared to 32 per cent for the category. Likewise, the 5-year return (CAGR) for the scheme has been under 5 per cent, 23 per cent of the time versus 1 per cent for the category over the same period.

Sundaram Small Cap has an upside (UCR) and downside capture ratio (DCR) of 93 per cent and 82 per cent respectively (last seven years). UCR/DCR provide a snapshot view of the extent to which the scheme has captured the market upside/downside. The higher the UCR and lower the DCR, the better.

A comparison with some of the top performers puts things in perspective. While Sundaram Small Cap has provided upside at par with SBI Small Cap and Nippon India Small Cap, it hasn’t fared well on downside protection. Sundaram Small Cap’s DCR of 82 per cent is significantly higher than that of 53 per cent and 67 per cent, respectively, for the two peer funds.

Portfolio and performance

Small-cap funds must invest at least 65 per cent of their assets in small-cap stocks. As of June-end 2021, Sundaram Small Cap held 70 per cent of its assets in small-cap stocks, 24 per cent in mid-caps and the rest in cash. In the past, the scheme has held over 90 per cent of its assets in small-caps many times.

Capital goods, cement and consumer durables have been among the top three sector holdings in the past. More recently, it has been healthcare, IT and consumer durables. As of June-end 2021, the three sectors accounted for 39 per cent of the scheme assets.

From March 2020 till date, while the benchmark index, the Nifty Smallcap 100 TRI (total return index) rose 221 per cent, the Sundaram Small Cap gained 181 per cent. This was likely impacted by the reduction in the scheme’s small-cap exposure from 92 per cent in November 2019 to 70 per cent by June 2021. Correspondingly, the mid-cap exposure was upped.

The scheme was an underperformer in 2016, when capital goods, cement and consumer durables accounted for around 40 per cent of the portfolio. Lower capacity utilisation and muted demand, along with a rise in fuel prices, hurt the cement sector in FY17. The leveraged balance sheets and underutilised capacities of many private sector companies impacted the demand for capital goods too.

The scheme is managed by Ratish Varier and Rohit Seksaria who have been at the helm only since July 2020 and February 2021, respectively.

With Sundaram AMC acquiring Principal Asset Management’s business, the small cap schemes of the two AMCs will likely be merged. Principal Small Cap was launched in May 2019 (₹412 crore AUM) and sector-wise, has a portfolio similar to that of Sundaram Small Cap. The latest one-year returns for the two schemes havebeen 93-99 per cent.

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