Last Updated on August 22, 2022 at 11:13 pm
We find that only three actively managed small cap mutual funds have managed to beat the Nifty Next 50 total returns index consistently over three, four and five-year durations. This study follows the Handpicked List of Mutual Funds Oct-Dec 2020 (PlumbLine) edition where we pointed out that we will be reevaluating small cap and midcap mutual funds vs Nifty Next 50 index.
The study on midcap mutual funds was published a few days ago: These four midcap mutual funds have outperformed Nifty Next 50 consistently The question we seek to answer is, “does it make sense investing in actively or passively managed mid cap and small cap mutual funds”. The answer for mid cap mutual funds is “no” and as we shall see here, this is true for small cap MFs as well.
Readers may recall that although SEBI defines Nifty Next 50 stocks as part of the large cap universe, we had earlier shown that it is illiquid (high impact cost) and therefore quite volatile as explained before Warning! Even “large cap” stocks are not liquid enough! Can you handle this?
We consider every possible 3,4 and 5 year return periods possible from 1st Jan 2013 (from the inception of direct plans) to Sep 29th 2020 (aka rolling returns). This is the full list of small cap funds. Funds in red do not have a five year history and were not considered.
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| Franklin India Smaller Companies Fund – Direct – Growth |
| DSP Small Cap Fund – Direct Plan – Growth |
| HSBC Small Cap Equity Fund – Growth Direct |
| Kotak-Small Cap Fund – Growth – Direct |
| Nippon India Small Cap Fund – Direct Plan Growth Plan – Growth Option |
| Sundaram Small Cap Fund – Direct Plan – Growth Option |
| Aditya Birla Sun Life Small Cap Fund – Growth – Direct Plan |
| Quant Small Cap Fund-Growth Option-Direct Plan |
| ICICI Prudential Smallcap Fund – Direct Plan – Growth |
| SBI Small Cap Fund – Direct Plan – Growth |
| Axis Small Cap Fund – Direct Plan – Growth |
| L&T Emerging Businesses Fund – Direct Plan – Growth |
| Union Small Cap Fund – Direct Plan – Growth Option |
| HDFC Small Cap Fund – Direct Growth Plan |
| BOI AXA Small Cap Fund Direct Plan Growth |
| Canara Robeco Small Cap Fund – Direct Plan- Growth Option |
| Edelweiss Small Cap Fund – Direct Plan – Growth |
| IDBI Small Cap Fund – Growth Direct |
| Invesco India Smallcap Fund – Direct Plan – Growth |
| Principal Small Cap Fund – Direct Plan – Growth Option |
Five years: 6/14 funds have outperformed Nifty Next 50 (NN50)with a consistency of 70% or more. For example, Franklin India Smaller Companies Fund – Direct Plan-Growth, got a better return than NN50 over five years 405 out of 680 times or 59.5%. Let us call this (return) outperformance consistency.
Four years: Only 5/14 funds managed 70% or more performance consistency!
Three years: Only 4/14 funds managed 70% or more performance consistency!
These are the three funds that qualified as above over 5 and 4 and 3 years.
| SBI Small Cap Fund – Direct Plan-Growth |
| Nippon India Small Cap Fund – Direct Plan-Growth Plan – Growth Option |
| L&T Emerging Businesses Fund – Direct Plan-Growth |
Isn’t it ironic that Nippon India introduced Nippon India Nifty Smallcap 250 Index Fund when they have a “good” active small cap fund? These results once again indicate the difficulty in staying invested in the “best funds”. This filter would give different results at different points in time. The simpler, easier, calmer option would be to choose a Nifty Next 50 (NN50) index fund and get on with it.
Readers can consult these NN50 resources to get started:
- Nifty + Nifty Next 50: What is a good mix?
- Which Nifty Next 50 index fund has the lowest tracking error?
- Do not expect double-digit returns from Nifty Next 50 index funds!
- Can I use these two index funds for retirement instead of Nifty, Nifty Next 50?
- Should I switch my SIP in Nifty Next 50 to Nifty 50?
- Should I rebalance between Nifty and Nifty Next 50 systematically?
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