SBI & DSP Small Cap Funds re-open lump sum investments: Should You Invest?

DSP Small Cap Fund and SBI Small Cap Fund have revoked the suspension of lump sum purchases effective 1st April and 30th March 2020 respectively. Here is what you need to know if you are considering an investment.

This the circular from SBI MF and this is the circular from DSP MF. Readers may recall in Aug 2019 we listed six small cap mutual funds that have consistently beaten mid cap and small cap benchmarks in terms of both risk and reward. Both SBI and DSP mutual funds were part of that list.

We had separately reviewed both funds as well. In the SBI small cap review, we had pointed out that SBI Small and Midcap Fund was converted to a small cap fund from May 15th 2018. Earlier it defined small cap as the bottom 100/500 in terms of market cap and could invest between 50 -70% in small caps.

It also had a capacity constraint clause of 750 crores.  As a result, the scheme closed for subscription in October 2015 and re-opened via SIP route only since May 2018. The scheme can now invest 65-100% in small caps defined as bottom 250 stocks in terms of market cap. The benchmark for the fund remains S&P BSE Small Cap Index. The fund has a good track record.

In our review of DSP Small Cap (previously known as DSP Microcap Fund) we noted that when it was DSP Micro Cap, it had the mandate to invest 65%-100% of its assets in stocks that had a free-float market cap lower than the top 300 shares. When it became DSP Small Cap in early 2018, it could invest the same portion in stocks beyond the top 250.

From just ~ 2,200 Crores in Jan 2016, it went to ~ 5000 Crores in just a year (when its return was only 12%). This prompted the AMC to stop fresh investments in Feb 2017. From April 2019, the fund has reopened investments via SIP and STP. Once the darling of young mutual fund investors who looked no further than trailing returns it slid from 5 to 3 stars. We had however shown that the fund has been a consistent performer.

What should investors do? With a significant fall in equity markets, both SBI and DSP have decided this is right to buy small caps at lower valuations and have re-opened for lump sum purchase.

I have always maintained that investors should avoid small cap funds. These crash down as fast as they move up and often move sideways for months end on. So over the long term, the additional risk taken is not compensated enough.

A good multi-cap fund has all the small cap exposure a typical retail investors needs. Those who wish to invest in small cap funds must be prepared to keep an eye one valuations or use technical indicators like 200-day moving averages and be ready to pull out money. AMCs closing subscriptions is also an indication to exit. Refer to our earlier study: How to book profits from mid cap and small cap funds tactically

If you are ready to make such periodic entry and exit and know how to evaluate the efficiency of your actions, you can invest in these funds when they open for lump sum investment after fully appreciating the risks involved.