Last Updated on October 1, 2023 at 6:15 pm
DSP Small Cap Fund (previously known as DSP Micro Cap Fund) was the darling of mutual funds after the Indian market “recovered” in later 2014. I last reviewed the fund in Aug 2017. Time for a re-look again as investors are worried about its recent performance.
The fact that is among the six consistent Small Cap Mutual Fund performers ought to have reassured them a bit. When the fund returned almost 102% in 2014, investors found it enticing, and risk awareness became the first victim. The AUM more than doubled in under a year!
From just ~ 2,200 Crores in Jan 2016, it went to ~ 5000 Crores in just a year (when its return was only 12%). Source: Motilal Oswal This prompted the AMC to stop fresh investments in Feb 2017. From April 2019, the fund has reopened investments via SIP and STP.
What is wrong with DSP Small Cap Fund?
Investors complain that DSP Small Cap has not performed well in the last couple of years. Technically, it has not beaten the BSE Small Cap TRI Index since mid-Oct 2015. What was once a five-star fund (the reason for investment) is now a three-star fund. Is this not terrible?
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Not quite. When it was DSP Micro Cap, it had a mandate to invest 65%-100% of its assets in stocks that had a free-float market cap lower than the top 300 shares. When it became DSP Small Cap in early 2018, it could invest the same portion in stocks beyond the top 250.
According to the AMC website, it currently holds about 82% of Small cap stocks. Is that good or bad? Well, that depends on history and when you choose to look! When launched, it was the only the second of its kind with Franklin India Smaller Companies Fund (Review: Performance with low volatility) the first.
If you look carefully at the existing small cap funds, many were mid and small cap funds before the SEBI categorization rules kicked in. I can argue that some are still operating that way and not as small cap funds.
Take, for example, HDFC Small Cap which has the highest AUM in the category. It has not fallen as much as the small cap index probably because of its higher mid cap exposure. The same is true of Axis Small Cap, which is fast catching the attention of investors with recency bias and even Franklin Smaller Companies.
Even in June 2018, when the BSE Small Cap index has been heading south for the last five months, DSP Small Cap held 83% of small cap stocks. So naturally, it would fall more than funds that increased mid cap stock allocation. Other than this, I do not find anything particularly wrong with the fund.
I am trying to make two points here. One, comparing apples (a small cap fund) with oranges (small and mid cap fund) is pear comparison, not peer comparison. Two, whatever the nature of the fund, what matters is if it able to beat a mid cap benchmark which we saw is more robust than a small cap benchmark to beat: Why your small cap mutual fund must beat this benchmark! Also, the small cap fund space is relatively new, and the small cap and mid cap funds may change colour quickly. So do tread carefully.
DSP Small Cap Fund vs Nifty Small Cap 250 TR Index
We shall consider every possible 1,2,3,4,5 year returns and find out how often the fund has beat a chosen index. We shall also find out how often the fund has fallen less than the benchmark when the index has delivered a negative return. This is known as downside protection.
| No of rolling return entries Index (1 Year) | 1371 |
| No of rolling return entries Fund (1 year) | 1371 |
| No of times fund has outperformed index (1 year) | 1020 |
| rolling return outperformance Consistency Score (1 year) | 74% |
| downside protection consistency (1 year) | 96% |
| No of rolling return entries Index (2 Years) | 1122 |
| No of rolling return entries Fund (2 years) | 1122 |
| No of times fund has outperformed index (2 years) | 759 |
| rolling return outperformance Consistency Score (2 years) | 68% |
| downside protection consistency (2 years) | 100% |
| No of rolling return entries Index (3 Years) | 875 |
| No of rolling return entries Fund (3 years) | 875 |
| No of times fund has outperformed index (3 years) | 833 |
| rolling return outperformance Consistency Score (3 years) | 95% |
| downside protection consistency (3 years) | 100% |
| No of rolling return entries Index (4 Years) | 630 |
| No of rolling return entries Fund (4 years) | 630 |
| No of times fund has outperformed index (4 years) | 630 |
| rolling return outperformance Consistency Score (4 years) | 100% |
| downside protection consistency (4 years) | 100% |
| No of rolling return entries Index (5 Years) | 388 |
| No of rolling return entries Fund (5 years) | 388 |
| No of times fund has outperformed index (5 years) | 388 |
| rolling return outperformance Consistency Score (5 years) | 100% |
| downside protection consistency (5 years) | 100% |
DSP Small Cap Fund vs Nifty Mid Cap 150 TR Index
| No of rolling return entries Index (1 Year) | 1367 |
| No of rolling return entries Fund (1 year) | 1367 |
| No of times fund has outperformed index (1 year) | 849 |
| rolling return outperformance Consistency Score (1 year) | 62% |
| downside protection consistency (1 year) | 72% |
| No of rolling return entries Index (2 Years) | 1119 |
| No of rolling return entries Fund (2 years) | 1119 |
| No of times fund has outperformed index (2 years) | 679 |
| rolling return outperformance Consistency Score (2 years) | 61% |
| downside protection consistency (2 years) | 100% |
| No of rolling return entries Index (3 Years) | 873 |
| No of rolling return entries Fund (3 years) | 873 |
| No of times fund has outperformed index (3 years) | 572 |
| rolling return outperformance Consistency Score (3 years) | 66% |
| downside protection consistency (3 years) | 100% |
| No of rolling return entries Index (4 Years) | 628 |
| No of rolling return entries Fund (4 years) | 628 |
| No of times fund has outperformed index (4 years) | 443 |
| rolling return outperformance Consistency Score (4 years) | 71% |
| downside protection consistency (4 years) | 100% |
| No of rolling return entries Index (5 Years) | 386 |
| No of rolling return entries Fund (5 years) | 386 |
| No of times fund has outperformed index (5 years) | 386 |
| rolling return outperformance Consistency Score (5 years) | 100% |
| downside protection consistency (5 years) | 100% |
I think that is very good consistency for a fund that has remained small cap-ish at all times.
Summary
I think DSP Small Cap fund has managed to do reasonably well all things considered in the past few years. Its return in the last year (trailing) has bee much better. Therefore I think existing investors can stay put. New investors must recognise risks before investing in any fund in this category.
DSP Small Cap has held a majority of small cap stocks at all times. So investors must first decide how they are going to diversify their equity portfolio before investing in this or such schemes. Even then, since small cap fund returns can jump from ecstasy to sorrow in quick time and therefore investors must learn to book periodic profits while running a SIP (if they wish to).
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