What is the alternative to DSP BlackRock Micro Cap?

The great tragedy in the mutual fund space is the temporary closure of DSP BlackRock Micro Cap Fund. So what is the alternative to DSP Microcap? Some common sense perhaps? Maybe asset allocation? No, that is not an attempt at humour, I am serious. Anyways, here is a couple of real alternatives to DSP Microcap until the great fund opens again and why I am not so keen to invest in such funds.

Well, I am keen, but will not have an exposure of more than 10%. Who does not like returns? But risk is the shadow of returns, and managing my portfolio would be harder with the kind of risk these funds pose. Sorry, I don’t buy the statements like:

  • “If my goal is decades away, I can invest in such funds”.
  • “I have high-risk appetite”

Risk management cannot go to sleep in the hope of long-term performance cannot go to sleep in the hope of long-term performance.

No more than 60% equity even if the goal is 50Y away.  For inexperienced investors (most of whom seem to worship microcap), no more than 15-20% of small caps. Better still, just one multi-cap fund would do. Do not get enticed by past performance.

As I wrote this, the breaking news is that Taurus debt mutual funds have dipped by 7% and 11% due to a bond downgrade (BILT). More on that later. The reason I bring it up is liquidity. The moment a bond gets downgraded, it becomes difficult to sell it. The same is true for mid-cap, small-cap and micro-cap in increasing order.

This is measured with the liquidity ratio released by CRISIL. This tells you the number of days it would take to liquidate the portfolio. According, this ET story, it would take close to a month or more to sell stocks in this segment (small cap). https://goo.gl/WumjNu

This means, if there is a crisis like 2008, there would be no buyers for such stocks and the NAV will plummet. This alone is enough reason for me avoid these funds. Enough of my nonsense. Off to the alternatives.

Remember I keep saying one of my mutual fund lessons that I prefer quiet performers that no one is looking at? Even a cursory glance at VR’s small cap fund list would tell you that Canara Robeco Emerging Equity is a candidate. NOT A RECOMMENDATION. JUST YAPPING WITH MY ANAL-yst cap one. Please exercise due diligence.

Canara Robeco is not exactly a small cap fund. It is a multi-cap fund with a bit of a small-cap tilt.It can invest in any stock that is below 150 in terms of market cap. It has been a quiet and consistent performer.

Update: The amc has now decided to make this fund a pure mid-cap only fund. A good move!

These are the 5Y returns since 20th June 2007 obtained using the Rolling Returns Calculator: Fund A vs. Fund B

There are 622 5-year data points in there. Can Robeco Emerging Equity has not done badly!

Just as, “100% equity portfolio will outperform a 65% equity portfolio” theory is BS, so is, “100% microcap will fetch the best returns”.

Franklin Smaller Companies also results in a similar graph. However, that is more popular (= much more AUM). Also, both the Canara Robeco and Franklin fund have had bad patches in the past. Canara Robeco got out of it quicker.

DSP Microcap is benchmarked to BSE Small Cap. Canara Robeco and Franklin Smaller Companies are benchmarked to Nifty Free Float 100 midcap. A look at how these fared against both benchmarks.

Performance with respect to Nifty Free Float 100 midcap (3Y rolling returns)

Performance with respect to BSE Small Cap TRI (3Y rolling returns)

Obviously, DSP has done quite well, but so have the other funds.

My recommendation

Avoid all small cap funds. Instead, choose a mid-cap fund. Good enough. Can’t take it with us anyway.

If some fund is popular in Asan Ideas For Wealth, avoid it. If people there talk about going north, go south.

If you want to invest in small cap funds, study how much the NAV can move up or down and then take a small exposure.

Let us not pretend that we know how to handle a tiger if meet one in the forest, just because we have read enough about it.

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7 thoughts on “What is the alternative to DSP BlackRock Micro Cap?

  1. Pattu sir, How about Reliance small cap..I believe this also falls in the same segment as Franklin smaller companies.

  2. @pattu – To be candid, this looks like a target on DSP BR Micro Cap Fund. If the fund manager wants to restrict new money for reasons like not finding enough opportunities, what is the problem and what -ve does it imply?

  3. If u look at the portfolio of DSP Micro cap & DSP small & mid cap many of the shares are over lapping.If smbody is hell bent on getting into Micro cap fund they can consider this one..Again in the future whether it will continue we don’t know.

  4. Pattu Sir,
    NAV is calculated as underlying stock market prices. Then how market value is low than NAV. Please clarify.

  5. Regd your comment “Let us avoid small cap funds”. I feel one can add some amount in small cap funds instead of avoiding them. If you refer DSP BR Micro cap fund or Franklin India smaller cos fund, these have been performing well over long term. Yes, i agree one can add large cap and midcap, but some portion in small cap would also help in growing money in faster pace….. Suresh KP

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