L&T Emerging Businesses Fund Review: Good performance but too quick AUM growth?

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This is a performance review of L&T Emerging Businesses Fund a small cap fund. We compare how it has fared against its benchmark and peers. Launched in May 2014, this will invest in “Emerging companies” defined as an early stage business that has the potential to grow at a faster rate than established companies.

Currently with an AUM of Rs. 6000+ Crores, the fund had stopped inflows greater than Rs. 2 Lakh as the small cap segment moved up significantly and relaxed this restriction early this year. The reader must recognise that this is a new player and therefore has not been tested across market cycles.

To its credit, it has done well since the small cap fall from Jan 2018. However, it should also be noted that many small cap funds are essentially dynamic small and mid cap funds. So their downside protection with respect to a small cap index will always be decent if not good.

L&T Emerging Businesses Fund Review: Good performance but too quick AUM growth?

This is the reason I keep stressing that any good mid cap fund will have all the small cap exposure an investor needs and another small cap fund is not necessary. Still, it seems to be the cup of choice for many, especially the new mutual fund investor. Just be aware that funds in this space can stop inflows (even from SIPs) when the market moves ups. Perhaps that should be seen as a signal to book periodic profits.

L&T Emerging Businesses Fund Features

The fund is probably one of the quickest to cross 4000/5000 Crores AUM since inception explaining why it had to restrict inflows. This is yet another problem in the small cap space where investors tend to exhibit herding especially after this segment has moved up.

The fund is benchmarked to BSE SmallCap TRI Index and can invest up to 35% in bonds with an option to invest in foreign equity too. According to SEBI rules, small cap funds should hold 65% of small cap stocks. This restriction is pretty hard for funds in this space to follow especially during down market periods.

Stock selection will focus on spotting companies that offer the best value relative to their respective long-term growth prospects, returns on capital and management quality.

Performance comparison with BSE SmallCap Index

Using the Mutual fund fingerprinting tool, we compare monthly returns of L&T Emerging Businesses Fund and BSE SmallCap TRI index and distinguish four regions.

L&T Emerging Businesses Fund vs BSE SmallCap TR IndexThis is a pretty good performance.  Also when compared to peers in the small cap category, the fund has managed to be among the top 5 when the last 3 and  5 year returns are considered. It did not protect the downside as much as Axis Smallcap or SBI Small Cap.

This, however, is a bit of a problem in this space. A true small cap fund cannot protect investors when the small cap index funds as much as a fund that takes on significant mid cap stocks. My suggestion to small cap investors is to study the fund portfolio for several months. Some fund presentations may have this data.

Do you want a true blue small cap fund that will always have say 60% of small caps at all times or you want a dynamic small-mid cap fund (change as per market conditions) or do you want a fund that is mid cap heavy (40% or so) at all times? Each fund in this category is quite different.

L&T Emerging Businesses Fund  vs NiftySmallCap50-TRI

Here are some stats from the June 2019 Equity Mutual Fund Performance Screener.

No of times fund has outperformed index (1 years)1007/1009
upside performance consistency (1 years)12%
downside protection consistency (1 years)56%
No of times fund has outperformed index (2 years)761/761
upside performance consistency (2 years)0%
downside protection consistency (2 years)58%
No of times fund has outperformed index (3 years)514/514
upside performance consistency (3 years)0%
downside protection consistency (3 years)81%
No of times fund has outperformed index (4 years)268/268
upside performance consistency (4 years)0%
downside protection consistency (4 years)100%
No of times fund has outperformed index (5 years)27/27
upside performance consistency (5 years)0%
downside protection consistency (5 years)100%

Naturally, these are good numbers but the fund is still young.

Summary: Should I invest (or continue investing) in this fund?

As mentioned above, this is a young small cap fund with a decent performance although untested in turbulent waters. In its defence, this is true of many peers too as they transformed from mid-capish funds to small-capish funds.

Its rapid AUM growth (raced to 4th spot) in such a short period is a concern. Although AUM will not grow much as long as small cap stocks do not head north, the fund could again be closed if there is a uniform bull run.

You can continue investing in this fund or consider this fund for fresh investments (if you must, there is no need though), however, be prepared for a bumpy ride and prolonged periods of poor performance and tactical entry and exit to lower risk.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, 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. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. Dear Sir,
    For my retirement (Hope retirement will be 18 years from now), I have started invested in L&T emerging business fund and SBI small cap fund since 2018 Jun.
    Per your research article , please explain a dynamic small-mid cap fund with few names that would help me. Thanks

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