Should I Exit Franklin India Smaller Companies Fund?

Investors in Franklin India Smaller Companies Fund are worried about its recent dip in performance. We evaluate its return and risk with respect to its benchmark to find out what investor should do

Franklin India Smaller Companies Fund vs Nifty Smallcap 250 TRI performance since June 2018

Published: January 11, 2020 at 11:27 am

Last Updated on

Investors in Franklin India Smaller Companies Fund are worried about its recent drop in performance. Is this because of the fund manager or because of the overall slump in smallcap stocks? We evaluate recent risk and reward of the fund with respect to its benchmark to find out what investors should do with the fund. Can new investors also consider this fund?

Regular readers may recall the review of this fund published in early 2019 where we pointed out its low volatility and performance. Let us now look at its recent performance. DIY investors can easily perform a similar analysis with any fund.

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As mentioned before, most of the investors in mutual funds in the last few years are new and have flocked to mid and smallcap mutual funds based only on their recent performance. Many are now disappointed that their funds are not able to replicate their past success. This is immature, to say the least.

Investors will need to consider the movement of the fund’s benchmark and how the fund has fared relatively before judging a fund. We saw how HDFC Mid-Cap Opportunities Fund has done quite well in spite of investor fears.

Let us now take a look at this Franklin Smallcap fund that started out as a closed-ended mid and smallcap fund. See fund review linked above for full history.

Franklin India Smaller Companies Fund vs Nifty Smallcap 250 – TRI

First, let us look at absolute returns for periods of less than a year. The fund has not done well in terms of downside protection.  This is, while returns do not matter for such short periods, it is reasonable to expect an actively managed fund to fall less when the index is down.

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MonthFundIndex
14.547.20
23.155.59
35.4711.71
47.6211.32
57.0011.28
6-1.671.28
7-6.31-4.46
8-1.92-1.10
9-6.36-6.40
10-3.21-3.17
111.783.98

However, if we look at annualized returns for longer durations, the fund has fared better. Although the fund has operated as a small cap fund only from 4th June 2018, it’s market cap history (see below) is fairly homogenous.

MonthsFundIndex
12-2.29-3.13
131.281.13
14-1.33-2.43
153.194.46
24-9.98-15.79
365.202.61
488.744.09
609.245.14
Asset Allocation history of Franklin India Smaller Companies Fund
Asset Allocation history of Franklin India Smaller Companies Fund

The fund has fared reasonably well since it started operations as a “pure” smallcap fund as seen in the featured image above.

The downside capture ratio is shown below for three different durations. A down capture ratio of 75% implies the fund has only captured 75% of the benchmark losses in the last three years whenever the benchmark fell down. These numbers are fairly impressive.

2017-Jan To 2020-Jan 75%
2018-Jan To 2020-Jan 68%
2019-Jan To 2020-Jan 66%

Should I Exit Franklin India Smaller Companies Fund?

Although the fund has had a poor run in the last year or so, its long-term performance is quite good. Investors should not dismiss this fund on the basis of the recent underperformance. Funds in this segment tend to be mercurial: large up and down movements. Comparatively, this is a sedate performer avoiding huge up or downswings.

New investors looking for smallcap exposure, but with a mature, long-term view can also consider this fund.

 

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

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3 Comments

  1. Given my immense respect of the intellectual & analytical elements in most of your articles, I must point out the need for tighter editing.

    The font size, placement of ads etc. do not make for pleasant reading experience. In TV serial “Silicon Valley” (a comic take on goings on in technological world), protagonists come out with breakthrough product, only to discover that they had completely ignored ‘user experience’. I feet you are one of those geeks.

    Would read your mails anyway. Informing you, just in case you are saying under your breath ‘Don’t Care’.

  2. I eagerly wait for your articles and analysis. If you may consider reducing your annual charges to 1000 I am sure most will be willing

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