This is a review of HDFC Small Cap Fund. Currently rated 5 stars by Value Research (hence the interest among readers to know more), the fund fell the least since Jan 2018 when the small cap index went south. However, there is more to the fund than that meets the eye. I write this article primarily to point this out.
Like most mutual funds, HDFC Small Cap has also seen rapid growth in AUM -partly due to inflow and partly due to the growth of small caps. According to Motilal Oswal Investment Services, the AUM was a mere 772 Crores in Feb 2016. It increased to 946 Crores in Feb 2017. A year later it was 2669 Crores (Feb 2018)!! Another year later (during which small cap stocks fell), the AUM rose to 6311 Crores!! So much of it due to inflow. Is this a case of hard selling and herd investing after the up movement is over? I think so.
HDFC Small Cap Fund AUM Movement
History of HDFC Small Cap Fund
• It was a multi-cap fund launched by Morgan Stanley (A.C.E. Fund )on April 3, 2008
• When HDFC acquired Morgan Stanley, they made it into a mid and small cap fund
• On November 2016 they then changed it into a small cap fund
The main reason I am writing this post is to point out that the fund has operated as a small cap fund only from Nov 9th 2016 onwards and even during this period, because of the fall since Jan 2018, it has had considerable exposure in mid caps. Therefore always consider the history of the fund before looking at returns and taking star ratings seriously.
Investment Strategy
According to the scheme presentation,
The focus is on well managed small cap companies.
• Businesses operating in a niche environment.
• Identify businesses at a relatively early stage in their life-cycle.
• Focus on quality metrics like ROCE & ROE.
• Invest predominantly in small cap companies.
• Identifying companies with reasonable growth prospects.
• Identify companies with sound financial strength and sustainable business.
• Seek undervalued businesses.
HDFC AMC misrepresents small cap risk!
Have a look at this slide from the presentation file
It first says (using cherry-picked data):
Volatility exhibited by the Small Cap benchmark is in line with large and midcaps
Then cautions at the bottom of the slide:
Small Caps carry a higher risk of market fluctuations and are also prone to higher liquidity risks. Small caps are strictly not comparable to Large caps stocks
Just for this, I would not invest in this fund.
The reality of small cap risk
This is the 10-year rolling risk (standard deviation) of Nifty Small Cap 100 vs Nifty Midcap 100 and other Indices as indicated below. Notice how the small cap index is distinctly more volatile.
HDFC Small Cap Fund vs Benchmark
This is a screenshot from Value Research since the time the fund operated as predominantly small cap. That is impressive but also means the fund has held a good amount of mid cap stocks throughout this period
The usual rolling risk and return graphs cannot be applied due to the short history of this fund.
HDFC Small Cap Fund vs Peers
The normalized NAV movement since 9th Nov 2016 is shown for HDFC Small Cap and other peers. The fund has protected investors well during the fall
Video Version
Summary
Although the fund has protected investors during the fall in small caps from Jan 2018, I do not think the fund has operated long enough as a small cap heavy fund. It may never do that and that is not a bad deal for investors. However, it is still early days.
If you look past the misrepresentation of product risk mentioned above, there are three choices:
- Stay away from small caps (recommended)
- Shop for a small cap fund like Franklin India Smaller Companies Fund Review: Performance with low volatility. This has the track record (relatively although it too had a bad past as a closed-ended fund)
- Take your chances with this fund.
If you want a choice between 2 and 3, the go with Franklin Smaller Companies fund. Since Franklin does not have a bank and demat service to push funds, its AUM growth could possibly be slower than this fund in future. However, my choice is (1) stay away from small caps.
We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Join our courses in exclusive Facebook Groups!
- 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
- Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content) in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author
M. 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 money management topics. 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 based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] comAbout freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)