Nippon India Small Cap Fund: Optimising Wealth through Diversification

May 25, 2023 / Reading Time: Approx. 10 mins

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Welcome to  PersonalFN's weekly analysis on diversified equity mutual funds. In this issue, we have analysed Nippon India Small Cap Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

Nippon India Small Cap Fund is the largest scheme in the Small Cap Fund category having a track record of over a decade. The fund is managed by Mr Samir Rachh who has a work experience of over two decades in the field of research and fund management.

Growth of Rs 10,000 if invested in Nippon India Small Cap Fund 5 years ago

Having a corpus of Rs 26,294 crore, Nippon India Small Cap Fund is currently the largest scheme in the Small Cap Fund category. Since its inception in September 2010, Nippon India Small Cap Fund has done well across market phases and built an impressive track record of superior performance. This has resulted in the scheme becoming popular among aggressive investors. The fund uses diversification as a risk-mitigation technique and holds a large portfolio of over 150 stocks spread across sectors. Nippon India Small Cap Fund aims to identify small-sized companies with high-growth potential that are available at relatively attractive valuations. Nippon India Small Cap Fund now stands among the top quartile performers in the Small Cap Fund category across time frames and has generated market-beating returns. In the last 5 years, Nippon India Small Cap Fund has grown at a CAGR of 19.2% compared to a growth of 10.6% in its benchmark Nifty Smallcap 250 – TRI. An investment of Rs 10,000 in Nippon India Small Cap Fund five years back would now be worth Rs 24,083, while a simultaneous investment in its benchmark would now be valued at Rs 16,541.

Graph 1
Past performance is not an indicator of future returns
May 24, 2023
(Source: ACE MF)
 

Nippon India Small Cap Fund's performance vis-á-vis category peers

Scheme Name Corpus (Cr.) 1 Year 2 Year 3 Year 5 Year 7 Year Std Dev Sharpe
Quant Small Cap Fund 4,092 27.06 21.28 65.98 25.60 19.46 26.09 0.56
Nippon India Small Cap Fund 26,294 29.30 23.78 51.80 19.21 22.89 19.89 0.55
HSBC Small Cap Fund 9,163 24.61 22.98 49.18 14.80 18.39 19.20 0.55
Canara Rob Small Cap Fund 5,482 15.89 21.16 47.83 -- -- 18.79 0.56
HDFC Small Cap Fund 15,857 31.90 21.50 48.86 15.23 20.20 19.96 0.52
Kotak Small Cap Fund 9,230 14.04 15.62 48.13 18.49 19.86 18.79 0.54
Franklin India Smaller Cos Fund 7,593 29.99 20.56 46.57 13.08 15.69 19.07 0.51
DSP Small Cap Fund 9,409 14.51 16.58 43.60 14.97 16.42 19.25 0.48
SBI Small Cap Fund 16,592 18.69 16.79 41.43 17.17 21.54 17.41 0.50
Axis Small Cap Fund 12,257 20.29 18.56 40.65 21.46 20.85 15.56 0.54
Nifty Smallcap 250 - TRI 15.70 12.06 43.08 10.58 14.01 22.34 0.42
The securities quoted are for illustration only and are not recommendatory
Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on May 24, 2023
(Source: ACE MF)
Please note, this table only represents the best-performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully before investing. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.
 

Nippon India Small Cap Fund was able to capitalise on the sharp run-up in the small-cap space seen in the last few years, which helped it find a spot among the top quartile performers in its category across time frames. In the last 1-year, 2-year, and 3-year time periods, Nippon India Small Cap Fund has outperformed the benchmark Nifty Smallcap 250 - TRI by a margin of around 8-14 percentage points and outpaced most of its peers by a broad margin. Even over the longer time period of 5 years and 7 years, the fund has managed to generate a substantial lead over the benchmark and the category average.

The fund's focus on quality stocks and holding on to them with a long-term view has helped it outperform the benchmark and its peers. Even though its volatility, as denoted by the Standard Deviation (19.89%) is slightly higher than the category average, it is much lower than the benchmark. Moreover, its Sharpe ratio (0.55), a measure of risk-adjusted return, is currently among the best in the category and far ahead of the benchmark.

Nippon India Small Cap Fund: Optimising Wealth through Diversification
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Investment strategy of Nippon India Small Cap Fund

Categorised as a Small Cap Fund, Nippon India Small Cap Fund is mandated to invest a minimum of 65% of its assets in equity and equity-related instruments of small-cap companies. SEBI defines small-cap stocks as companies ranking 251st onwards in terms of full market capitalisation. Nippon India Small Cap Fund aims to build a portfolio that adequately reflects a cross-section of the growth areas of the economy from time to time. The scheme's investment philosophy focuses on investing in companies with long-term growth potential available at reasonable valuations. It looks to identify high-growth businesses with reasonable size, quality management, and rational valuation.

The fund manager adopts risk management measures such as margin of safety and diversification across sectors and stocks with an aim to generate relatively better risk-adjusted returns over a period of time. Nippon India Small Cap Fund holds a large portfolio of more than 150 stocks to benefit from an optimal mix of growth, economic revival, value, and thematic plays. The fund also allocates a significant portion of its portfolio in stocks of large-cap and mid-cap companies depending on market conditions to minimise the high risk associated with small-cap stocks. Nippon India Small Cap Fund follows a buy-and-hold strategy for most of its stock holdings and has recorded a low turnover rate of 25-30% in the last one year.

Top portfolio holdings in Nippon India Small Cap Fund

Graph 2 Graph 2
Holding in (%) as of April 30, 2023
(Source: ACE MF)
 

Nippon India Small Cap Fund holds a large number of stocks in the portfolio and limits the exposure to individual stocks to well under 5% in order to reduce the high downside risk associated with small-sized companies. As of April 30, 2023, the fund held 169 stocks in the portfolio, with the top 10 stocks accounting for just 17% of its assets. Small-cap names such as NIIT, Balrampur Chini Mills, Tejas Networks, and Zydus Wellness currently form part of the fund's top 10 holdings, along with a few large-cap and mid-cap names such as Tube Investments of India, HDFC Bank, KPIT Technologoies, Bank of Baroda, Navin Fluorine International, and L&T.

In the last two years, the fund has benefited the most from its holdings in KPIT Technologies, Tube Investments of India, Apar Industries, Tejas Networks, and Radico Khaitan that have turned out to be multi-baggers, contributing around 15% to its absolute gains in the last two years. It also gained from its exposure to Raymond, NIIT, Carborundum Universal, Poonawala Fincorp, Timken India, Navin Flourine International, and West Coast Paper Mills, among many others.

Nippon India Small Cap Fund's portfolio is well-diversified across Cyclical and Defensive sectors. The fund's portfolio is currently skewed towards the Engineering sector, followed by Financials. These sectors collectively account for 39% of Nippon India Small Cap Fund's assets. It also holds substantial exposure to Infotech, Consumer Durables, Consumption, and Chemicals having allocation in the range of 5-9%. The top 5 sectors account for 55.5% of its assets.

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.

 

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.

Disclaimer: 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.

 

DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014

About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr Ajit Dayal with an objective of providing value-based information/views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc. and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services.

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of the second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.

Disciplinary history

There are no outstanding litigations against the Company, its subsidiaries and its Directors.

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Details of associates

  1. Money Simplified Services Private Limited;

  2. PersonalFN Insurance Services India Private Limited;

  3. Equitymaster Agora Research Private Limited;

  4. Common Sense Living Private Limited;

  5. Quantum Advisors Private Limited;

  6. Quantum Asset Management Company Private Limited;

  7. HelpYourNGO.com India Private Limited;

  8. HelpYourNGO Foundation;

  9. Natural Streets for Performing Arts Foundation;

  10. Primary Real Estate Advisors Private Limited;

  11. HYNGO India Private Limited;

  12. Suresh Lulla;

  13. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest
  1. ‘subject company’ is a scheme on which a buy/sell/hold view or target price is given/changed in this Research Report;

  2. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company;

  3. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report;

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Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. & Corp. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021

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