Franklin India Smaller Companies Fund Review: Performance with low volatility

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This is a performance review of Franklin India Smaller Companies Fund. They launched the fund as a closed -ended fund mid and small cap fund in Jan 2006 and became open-ended from April 2011. From June 4th 2018, it became a small cap fund in line with SEBI regulations. We compare the risk and reward of Franklin India Smaller Companies Fund with its benchmark and peers.

With an AUM of 6800+ crores, it is the second biggest small cap fund behind Reliance Smal cap. It also has the second lowest volatility in the last three-year period behind Axis Small Cap. This is possible because of its exposure to mid cap stocks (~ 36%). As a result, the fund fell 10% less than its current benchmark: Nifty Small cap 250 TRI.

Franklin India Smaller Companies Fund: Closed Ended Mode

When the fund operated in closed-ended mode, the performance (wrt old benchmark) looks unimpressive at first sight. However, considering the momentum of the market upwards and downwards on either side of the 2008 crash, it seems reasonable.

Franklin India Smaller Companies Fund when it was a closed-ended fund

Franklin India Smaller Companies Fund: Open-ended mode

To its credit, the fund redeemed itself in its open-ended avatar from Jan 2011. As a result, the AUM swelled fast. Going forward, this could be a problem.

Franklin India Smaller Companies Fund after it became open-ended

Last we discussed SBI Small Cap Fund and compared AUM in this category. While SBI Small cap has reasonably low AUM, it was a high risk and potential high reward fund.  As we shall see below, Franklin India Smaller Companies Fund is a lower risk alternative.

 

Rolling returns and risk comparison set 1

Let us consider the performance of Franklin India Smaller Companies Fund along with benchmarks and peers. As usual, we shall look at the rolling returns and rolling risk over 3 and 5 years. Rolling returns considers every possible 3 or 5 year period from Jan 2011 (when it became open-ended) to now. For a rolling risk calculation, we consider the monthly returns over every possible 3 and 5 year window and compute the standard deviation. If you wish to plot similar graphs for your funds, use this too: Evaluating Volatility in Returns

Five years

The top panel shows the rolling returns and the bottom panel rolling risk. The number of data points in each curve is shown inside the graph – 767 below.

Rolling return and risk over 5 years for Franklin India Smaller Companies Fund and peers

Impression: Franklin India Smaller Companies Fund has beat the benchmark in terms of risk and return comfortable. In fact, it is has the lowest risk as shown in the bottom panel. As shown last week SBI Small Cap has impressed in the last couple of years and this is clear from the return graph above.

Three years

Over three years, there is not much to tell between the Franklin and SB funds, although Franklin remains lower in terms of risk.

Rolling return and risk over 3 years for Franklin India Smaller Companies Fund and peers

Rolling returns and risk comparison set 2

I have included Kotak and DSP Small cap (micro cap) funds in this set. The five year performance of the DSP fund has dipped but still above the Franklin fund

Another set of Rolling return and risk over 3 years for Franklin India Smaller Companies Fund vs benchmarks and peers

Overall impression

The lower volatility of Franklin India Smaller Companies Fund stems possibly from its mid cap tilt. While this may be a poor strategy in a rising market, it will protect downside in a falling market. Also one look at a graph like the ones above and assume the SBI fund is better than Franklin or Franklin fund is better than the rest. In this space, things change quick and fast.

As long as a small cap fund is able to beat its benchmark consistently at lower risk, the investor should stay put. This is the case with Franklin India Smaller Companies Fund.

Summary

Franklin India Smaller Companies Fund its open-ended avatar has an impressive track record. I think existing investors can stay put. New investors who value “performance” over volatility may get frustrated with this fund when they compare it with peers. For such investors, SBI Small cap can be a good initiation into risk and reward experience.

 

If you do not mind a fund that goes heavy on mid caps to prevent downside, a fund with not so small an AUM, then the Franklin fund is a reasonable choice. That said, please recognise that mid cap or small cap fund should only be used for truly long term goals: above 10 years. Even then there is no guarantee of success. You can consider adopting a goal based periodic profit booking strategy

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.

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