These smallcap mutual funds have beat Nifty Next 50 consistently!

/ M. Pattabiraman / @pattufreefincal / 4 Comments

Published: June 24, 2020 at 11:35 am

Last Updated on June 28, 2020

We look at how actively managed smallcap mutual funds have performed with respect to the Nifty Next 50 (NN50) Total Returns Index.  This is a natural follow up to midcap funds vs NN50 study in which we found only three midcap mutual funds have beat Nifty Next 50 consistently over every possible 3,4 and 5 year periods.

Why is this comparison made: Nifty Next 50 has a risk and reward almost identical to that of the Nifty Midcap 150 Index. In fact, Nifty Next 50 is a bit more volatile. See: Worried about Nifty Next 50 Index? What you need to know. Also, we found that Small cap funds struggle to beat Nifty Midcap 150 index: Why your small cap mutual fund must beat this benchmark! This naturally leads to a comparison of NN50 with smallcap funds.

Although Nifty Next 50 is “technically” part of the large cap universe, it is illiquid and therefore quite volatile as explained before Warning! Even “large cap” stocks are not liquid enough! Can you handle this?

We shall consider rolling returns. That is, we shall compare every possible 1,2,3,4 and 5 year return periods possible from January 1st 2013 (from the inception of direct plans) to June 19th 2020. We shall only consider funds that have enough history to generate 1000 or more  1,2 and 3-year rolling return data points. This is the full list of 21 smallcap funds considered for the study.

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
Reliance 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
IDBI Small Cap Fund – Growth Direct
Invesco India Smallcap Fund – Direct Plan – Growth
Tata Small Cap Fund-Direct Plan-Growth
BOI AXA Small Cap Fund Direct Plan Growth
Edelweiss Small Cap Fund – Direct Plan – Growth
Canara Robeco Small Cap Fund – Direct Plan- Growth Option
Principal Small Cap Fund – Direct Plan –  Growth Option

Among these,  IDBI Small Cap Fund, Invesco India Smallcap Fund, Tata Small Cap Fund; BOI AXA Small Cap Fund; Edelweiss Small Cap Fund; Canara Robeco Small Cap Fund; Principal Small Cap Fund were removed as the no of rolling return one-year data points were less than a thousand (young funds with short history). These funds are indicated in red above.

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 got a better return than NN50 over five years 405 out of 604 times or 67% of all studied periods. Let us call this performance consistency.  Note:  these funds had less than 500 data points. More history is required.

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

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

Three years: Only 3/14 funds managed 70% or more performance consistency!

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

One year: Only 2/14 funds managed 70% or more performance consistency!

These are the three smallcap funds that qualified as above over 5,4 and 3 years:

SBI Small Cap Fund – Direct Plan – Growth
Reliance Small Cap Fund – Direct Plan-Growth
L&T Emerging Businesses Fund – Direct Plan – Growth

Even if we consider trailing returns, over the last year, only 5 out of 21 smallcap funds have managed to outperform Nifty Next 50 TRI. That is, get a less negative return.

What do these results mean?  As in the midcap vs NN50 study, it is simply impossible to be invested in a smallcap fund that even “typically” beats NN50 or Nifty MIdcap 150 (which is tougher to beat than a smallcap index). Therefore, the central conclusion of this study is the same:

A mix of Nifty and Nifty Next 50 index funds is all that a retail investor needs to gain exposure across large, mid and small cap segments of the market.

Or in other words, those who want to have smallcap (or midcap) exposure need not look beyond Nifty Next 50 passive funds. See: Combine Nifty and Nifty Next 50 funds to create large, mid cap index portfolios and What is the best way to invest in Nifty Next 50 Index? and ICICI Nifty Next 50 Index Fund vs Reliance ETF Junior BeEs

Investors are better off with a Nifty Next 50 index fund than Motilal Oswal Nifty Smallcap 250 Index Fund or Motilal Oswal Nifty Midcap 150 Index Fund, or any other active smallcap or midcap funds since it is impossible to predict which active fund would outdo NN50 in future.

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About the Author Pattabiraman editor freefincalM. 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] com
About 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)
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