HSBC Small Cap Fund: Focusing on High Conviction Small-Sized Stocks

HSBC Small Cap Fund is a Small Cap Fund that focuses on maintaining a diverse portfolio at all times to mitigate various risks. The fund has registered noteworthy growth over the past few years and has rewarded investors with reasonable risk-adjusted returns.

The erstwhile L&T Emerging Businesses Fund was merged with HSBC Small Cap Equity Fund in October 2022 after HSBC AMC acquired L&T AMC, and the surviving scheme was renamed as HSBC Small Cap Fund. Notably, the formerly known L&T Emerging Businesses Fund had gained popularity due to its superior run between 2015 and 2017, resulting in a significant rise in its AUM. The fund aims to identify under-researched and under-owned small-cap stocks available at reasonable valuations that possess the ability to demonstrate high earnings growth potential. It maintains a small-cap-biased portfolio and also carries significant exposure towards the mid-cap segment.

Since its launch in May 2014, the fund has generated returns at a CAGR of 23.8%, compared to a growth of 20.6% in its benchmark Nifty Smallcap 250 - TRI. HSBC Small Cap Fund's small-cap and mid-cap heavy portfolio hit a rough patch in terms of performance between 2018 and 2020 as the segment underperformed during this period and it carried no exposure to large caps that outperformed. However, the fund witnessed significant improvement in performance between 2021 and 2023 which enabled it to improve its overall track record. The fund benefits from the expertise of its fund managers which includes the AMC's CIO of Equities - Mr Venugopal Manghat - who has been at the helm of the scheme since its inception.

In the last five years, HSBC Small Cap Fund's NAV grew at a CAGR of 34.1% which is marginally higher than the 33.4% CAGR delivered by its benchmark. An investment of Rs 10,000 in HSBC Small Cap Fund would have now quadrupled to Rs 43,458 while a simultaneous investment in the Nifty Smallcap 250 - TRI index would have appreciated to Rs 42,372.

Despite witnessing bouts of underperformance in the interim, HSBC Small Cap Fund has displayed its potential to bounce back and reward investors reasonably over the long run. The fund trailed the category average during the 2020 market crash but managed to bounce back in the ongoing bull phase, finding a place among top performers in the category. The recent outperformance has helped improve its long-term returns. Barring the last 1-year period, HSBC Small Cap Fund has outperformed the benchmark across time frames but has trailed some of its peers over the longer 5-year and 7-year period.

The volatility registered by the fund is lower than the benchmark though it is slightly higher than the category average. Meanwhile, its Sharpe ratio is higher than the benchmark and category average, denoting its ability to reward investors with reasonable risk-adjusted returns.

[Read: Want to Invest in Small cap Funds? Manage the Risk and Reward Well]

What is the investment strategy of HSBC Small Cap Fund?

HSBC Small Cap Fund invests predominantly in small-cap stocks (around 70-75% of its assets) while the balance is mainly allocated in stocks of mid-cap companies. It adopts a blend of the 'top-down' and 'bottom-up' approach to invest in equities. The fund selects sectors based on the fund manager's analysis of business cycles, regulatory reforms, competitive advantage etc. It then selects stocks within the shortlisted sectors based on their fundamentals. To identify the potential of stocks the fund evaluates them based on their industry structure, the quality of the management, corporate governance trends, sensitivity to economic factors, the financial strength of the company, and the key earnings drivers.

HSBC Small Cap Fund aims to invest in stocks with an adequate margin of safety, focusing on their valuations and growth potential. It invests with a long-term view and has recorded a low turnover of around 15-25% in the last one year.

HSBC Small Cap Fund holds a large portfolio of about 90-100 stocks. As of August 31, 2024, the fund invested in 97 stocks with the top 10 stocks accounting for 23.3% of its assets. Its top holdings comprise a mix of small-cap, mid-cap, and large-cap names such as Apar Industries, Techno Electric & Engineering Company, Trent, KPIT Technologies, and Century Textiles & Industries. The fund has restricted exposure in each stock to under 3% to mitigate the liquidity risks associated with stocks of small-sized companies.

In the last two years, HSBC Small Cap Fund benefitted the most from its prominent exposure in Apar Industries, KEI Industries, Trent, Techno Electric & Engineering Company, and Brigade Enterprises that turned out to be multibaggers. It is also gained from its holdings in Indian Bank, KPIT Technologies, Finolex Cables, Persistent Systems, Sonata Software, Polycab India, Dixon Technologies, Supreme Petrochem, KPR Mill, Ratnamani Metals & Tubes, and EIH, among many others.

HSBC Small Cap Fund's portfolio is spread across 18 sectors with reasonable exposure across defensive, cyclical, and sensitive sectors. Engineering stocks dominate its portfolio while Construction, Finance, Infotech, Pharma, and Auto Ancillaries are among the other core sectors. It also holds diversification in Textiles, Consumer Durables, Chemicals, Consumption, Metals, Banks, and Cement, among others.

Is HSBC Small Cap Fund suitable for my investment goals and risk tolerance?

In its decade-long journey, HSBC Small Cap Fund has been through phases of outperformance as well as underperformance and has managed to reward investors with satisfactory gains over the long run. Moreover, the fund has achieved this without exposing the portfolio to undue risks, resulting in decent risk-adjusted returns.

HSBC Small Cap Fund maintains a well-diversified portfolio across sectors to avoid concentration risk, which can help it perform well over complete market cycles. Additionally, with experienced fund managers at the helm, the fund can benefit from stable growth in the portfolio.

HSBC Small Cap Fund is suitable for investors looking to benefit from the high growth potential of small and mid-cap stocks with an investment horizon of at least 5-7 years.

Watch this video to find out whether it is a good time to invest in Small Cap Funds:

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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