August 04, 2015

Mutual Fund Category Analysis Equity Diversified Small-cap Funds

RETAIL RESEARCH

Performance of Small-cap Equity Mutual Funds:

Scheme Name

Benchmark

Scheme's
Age (Yrs)

Latest
Corpus
(Rs Crs)

Expense
Ratio
(%)

Trailing Returns (%)

1
Year
CAGR

3
Years
CAGR

5
Years
CAGR

Rolling Returns (%)

7
Years
CAGR

6
Months
Absolute

1
Year
CAGR

2
Years
CAGR

3
Years
CAGR

5
Years
CAGR

Standard
Deviation
(Monthly)

Pure Small-cap Funds:

AXIS Small Cap Fund (G)

CNX Smallcap Index

1.68

314

2.81

29.21

DSP BR Micro-Cap Fund (G)

S&P BSE Small-Cap

8.21

2010

2.41

48.40

39.79

20.56

25.94

15.51

29.36

17.94

16.66

23.98

5.63

Reliance Small Cap Fund (G)

S&P BSE Small-Cap

4.89

1604

2.49

32.67

39.07

12.97

32.17

25.12

25.32

6.39

SBI Small & Midcap Fund (G)

S&P BSE Small-Cap

5.98

407

2.61

53.33

43.71

23.89

11.78

25.85

17.68

17.21

22.37

5.31

Funds that maintain notable allocation into Small-cap stocks:

Sundaram S.M.I.L.E Fund (G)

CNX Midcap & BSE Small

10.54

1110

2.63

43.30

34.94

16.38

19.83

12.61

24.97

13.98

12.24

13.18

7.09

Sahara Star Value Fund (G)

S&P BSE 200

5.97

2.52

-1.43

15.83

6.93

6.13

13.35

6.34

5.39

9.27

7.22

Reliance Mid & Small Cap Fund (G)

S&P BSE Mid-Cap

8.68

2273

2.38

31.34

32.46

16.85

19.09

10.59

20.87

14.13

13.18

12.13

5.45

Average of Equity Diversified - Large-cap Funds

2.64

19.47

21.90

11.69

13.86

8.09

16.28

11.92

10.99

12.59

4.36

Average of Equity Diversified Mid-cap Funds

2.59

31.70

32.32

17.31

19.31

12.16

24.86

15.52

13.49

13.94

5.06

Average of Equity Diversified Small-cap Funds

2.50

44.80

40.86

22.23

25.94

13.42

29.13

20.25

19.73

23.18

6.39

Average of Equity Diversified Multi-cap Funds

2.52

22.77

24.24

12.92

14.97

9.03

17.86

12.53

11.14

12.82

4.72

CNX Midcap

24.27

22.91

10.07

14.55

8.74

16.69

9.87

9.18

12.90

CNX NIFTY

11.14

18.34

9.66

10.69

6.36

11.50

8.50

8.78

12.20

S&P BSE Small-Cap

13.71

20.45

4.23

8.64

7.93

15.33

4.50

2.42

4.22

Benchmark:

Note: NAV values are as of Jul 22, 2015. Rolling returns are calculated from the last 7 years NAV history. Standard Deviation calculated on monthly returns from last three years data.

Key Facts:

What are they? Small-cap funds are equity Diversified schemes investing maximum into small-cap stocks.

Small-cap funds Category: There are 4 schemes - AXIS Small Cap Fund, DSP BR Micro-Cap Fund, Reliance Small Cap Fund and SBI Small & Midcap Fund coming
under this Small-cap category. These schemes follow the investment strategy of investing maximum (between 35 to 55%) into small cap stocks (which
eventually grow into midcaps post which the fund may look like a midcap fund). Apart from these, among the many mid-cap schemes, there are three schemes
as Sundaram S.M.I.L.E Fund, Sahara Star Value Fund and Reliance Mid & Small Cap Fund which maintain allocating notable assets into small-cap stocks over
periods.

RETAIL RESEARCH

Nature of Small-cap Mutual Funds: Small-cap schemes are very high risk high return investments which are suitable only for high risk appetite investors. In
general, small and mid-cap stocks are high beta stocks and respond faster than large caps to the market information. They have higher return potential
compared to large caps. The following are some of the reasons why Small / Mid cap companies offer higher return potential.

Relatively less known by market participants / price discovery by market is not full.
Better growth prospects due to presence in a new segment/ area that is growing at a faster pace.
Ability to gain share due to new technology, better product / service etc.
Smaller base of revenues and profits; hence growth rates can be larger.
Floating stock may be limited; hence small demand for stocks results in more than proportional rise in prices.
Room for P/E multiples to expand if the company transitions from a small / mid cap to large cap, etc.

Large-cap Vs. Small & Mid-cap: As far as large cap companies are concerned, the growth is lower as compared to the period when they were small & mid cap
companies as they are there in the relatively early stages of their business life cycles and their base was smaller. Small and mid-cap stocks also offers investors
opportunities to capitalize on merger and acquisition activity as some attractive businesses have the potential to be acquired by larger firms. Small and Mid-Cap
companies offer higher return potential than large cap companies and also carry higher risk than large cap companies, particularly over the short and medium
term.

Performance: The performance of the Small-cap category has been notable from late 2013, wherein the domestic equity market witnessed start of its bull run
on the back of expectation on formation of progressive government at the center. Till January 2015, most of the mid and small cap stocks reached their life
time high and posted commendable returns in comparison to large-cap counter parts. During the period from Sep 2013 to Jan 2015, the S&P BSE Small-cap
index posted CAGR returns of 77% while CNX Nifty and CNX Midcap posted 43% and 64%. The schemes belonging to the small-cap category also posted triple
digits returns during these period. Prior to that, during the period between 2010 and 2013, the small-cap category posted below average returns due to the
muted performance delivered by the small cap stocks. Since January 2015, the S&P BSE Small-cap index posted 7% returns wherein the CNX midcap posted 9%
returns (absolute terms). The performance based on the rolling returns shows the better performance of the small-cap schemes. All the three schemes, DSP BR
Micro-Cap Fund, Reliance Small Cap Fund and SBI Small & Midcap Fund posted outperforming returns compared to other categories. AXIS Small Cap Fund has
short term NAV history hence excluded from the comparison. Performance during various market cycles has been mixed for the category as they posted higher
returns during market up moves but delivered worst returns during market down turns (see the charts below).

Portfolio: The portfolio of the schemes are well diversified within the mid and small cap stocks. Based on our market cap classification (M cap of more than Rs.
10,000 crore are large-cap while Mcap of between Rs, 1,000 crore and Rs. 10,000 crore are considered as mid cap. Stocks that are having Mcap of less than Rs.
1,000 crore are considered as small cap). Given that most of the mid and small caps turned higher valued thanks to the recent bull run, the schemes from the
small category saw allocating most in midcap stocks. However, SBI Small & Midcap Fund allocates more in small caps compared to its peers. Indoco Remedies
Ltd, Kalpataru Power Transmission Ltd, DCB Bank Ltd, Atul Ltd and Navin Fluorine International Limited are the top 5 holding by the category. Industrial
Products, Textile Products, Chemicals & Others, Pharma and Finance are the top 5 sectors held by the category as per the latest data.

RETAIL RESEARCH

Small-cap Funds Vs. Other Equity Diversified sub-categories:

Equity Diversified Categories Performance (based on Rolling Returns):
Scheme Name

6 Month Absolute

1 Year CAGR

3 Year CAGR

5 Year CAGR

Average of Equity Diversified - Large-cap Funds

8.09

16.28

10.99

12.59

Average of Equity Diversified Mid-cap Funds

12.16

24.86

13.49

13.94

Average of Equity Diversified Small-cap Funds

13.42

29.13

19.73

23.18

Average of Equity Diversified Multi-cap Funds

9.03

17.86

11.14

12.82

Note: NAV values are as of Jul 22, 2015. Top 2 performers are highlighted by yellow. Returns are rolling calculated from the last 7 years NAV history.

Small-cap Funds Vs. Other Equity categories in various cycles:

Risk Parameters: Standard Deviation:

The above chart shows the Small-cap categorys better performance especially during equity
market up moves compared to other equity oriented categories but underperformance during
market falls.

As seen in the above chart, the highest Standard Deviation (calculated based on the monthly
returns from the last 3 years NAV data) to the Small-cap category makes the category higher risky
in comparison to the other equity diversified categories.

RETAIL RESEARCH

Performance of the schemes during market cycles:

M cap break-up DSP BR Micro cap:

M cap break-up SBI Small & Midcap Fund:

M cap break-up Reliance Small Cap:

Name and investment attributes were changed on Nov 2013, as Daiwa Industry Leaders Fund was
renamed as SBI Small & Midcap Fund.

RETAIL RESEARCH

Allocation to Sectors by the Small-cap Category:

Performance of schemes from Small-cap category:

RETAIL RESEARCH

Top 10 Stocks held by the Small-cap category:

Yearly performance of Large, Mid and Small cap Indices:

Analyst: Dhuraivel Gunasekaran (dhuraivel.gunasekaran@hdfcsec.com)

Source: NAVIndia & ACEMF

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website:
www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com
Disclaimer: Mutual Funds investments are subject to risk. Past performance is no guarantee for future performance This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for
circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed
reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or
perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients
This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or may not match or may be
contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.

RETAIL RESEARCH