Only these 3 Small Cap MFs have outperformed Nifty Next 50 consistently

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: October 7, 2020 at 12:01 pm

Last Updated on August 22, 2022 at 11:13 pm

We find that only three actively managed small cap mutual funds have managed to beat the Nifty Next 50 total returns index consistently over three, four and five-year durations. This study follows the Handpicked List of Mutual Funds Oct-Dec 2020 (PlumbLine) edition where we pointed out that we will be reevaluating small cap and midcap mutual funds vs Nifty Next 50 index.

The study on midcap mutual funds was published a few days ago: These four midcap mutual funds have outperformed Nifty Next 50 consistently The question we seek to answer is, “does it make sense investing in actively or passively managed mid cap and small cap mutual funds”. The answer for mid cap mutual funds is “no” and as we shall see here, this is true for small cap MFs as well.

Readers may recall that although SEBI defines Nifty Next 50 stocks as part of the large cap universe, we had earlier shown that it is illiquid (high impact cost) and therefore quite volatile as explained before Warning! Even “large cap” stocks are not liquid enough! Can you handle this?

We consider every possible 3,4 and 5 year return periods possible from 1st Jan 2013 (from the inception of direct plans) to Sep 29th 2020 (aka rolling returns). This is the full list of small cap funds. Funds in red do not have a five year history and were not considered.

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Franklin India Smaller Companies Fund – Direct – Growth
DSP  Small Cap Fund – Direct Plan – Growth
HSBC Small Cap Equity Fund – Growth Direct
Kotak-Small Cap Fund – Growth – Direct
Nippon India Small Cap Fund – Direct Plan Growth Plan – Growth Option
Sundaram Small Cap Fund – Direct Plan – Growth Option
Aditya Birla Sun Life Small Cap Fund – Growth – Direct Plan
Quant Small Cap Fund-Growth Option-Direct Plan
ICICI Prudential Smallcap Fund – Direct Plan – Growth
SBI Small Cap Fund – Direct Plan – Growth
Axis Small Cap Fund – Direct Plan – Growth
L&T Emerging Businesses Fund – Direct Plan – Growth
Union Small Cap Fund – Direct Plan – Growth Option
HDFC Small Cap Fund – Direct Growth Plan
BOI AXA Small Cap Fund Direct Plan Growth
Canara Robeco Small Cap Fund – Direct Plan- Growth Option
Edelweiss Small Cap Fund – Direct Plan – Growth
IDBI Small Cap Fund – Growth Direct
Invesco India Smallcap Fund – Direct Plan – Growth
Principal Small Cap Fund – Direct Plan –  Growth Option

Five years: 6/14 funds have outperformed Nifty Next 50 (NN50)with a consistency of 70% or more. For example, Franklin India Smaller Companies Fund – Direct Plan-Growth,  got a better return than NN50 over five years 405 out of 680 times or 59.5%. Let us call this (return) outperformance consistency.

Four years: Only 5/14  funds managed 70% or more performance consistency!

Three years: Only 4/14 funds managed 70% or more performance consistency!

These are the three funds that qualified as above over 5 and 4 and 3 years.

SBI Small Cap Fund – Direct Plan-Growth
Nippon India Small Cap Fund – Direct Plan-Growth Plan – Growth Option
L&T Emerging Businesses Fund – Direct Plan-Growth

Isn’t it ironic that Nippon India introduced Nippon India Nifty Smallcap 250 Index Fund when they have a “good” active small cap fund? These results once again indicate the difficulty in staying invested in the “best funds”. This filter would give different results at different points in time. The simpler, easier, calmer option would be to choose a Nifty Next 50 (NN50) index fund and get on with it.

Readers can consult these NN50 resources to get started:

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