Nippon India Small Cap Fund: Optimising Wealth through Diversification

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.

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

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.

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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.

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.

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.

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