SBI Small Cap Fund: Focusing on Multi-bagger Small-sized Companies

Small Cap Mutual Funds are high risk - high return equity mutual funds. Investment in Small Cap Mutual Funds is associated with higher risk levels compared to Mid Cap Funds and Large Cap Funds as they invest in lesser-known and under-researched companies. Over the short and medium, Small Cap Funds can witness intense volatility and higher downside, particularly during bearish market phases. Nonetheless, they can generate significant alpha and even outperform most other sub-categories of equity-oriented mutual funds over the long term.

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SBI Small Cap Fund is one of the most popular schemes in the Small Cap Fund category that has generated significant alpha for its investors in the long run.

Past performance is not an indicator of future returns
Data as of March 07, 2023
(Source: ACE MF)

SBI Small Cap Fund stands out for its ability to showcase superior performance across most time periods and generate significant alpha for its investors. While the fund has significantly outperformed the benchmark S&P BSE 250 Small-Cap - TRI and the category average during bull market phases in the past, its performance during bear phases has been commendable too. Over the longer time period of 5 years and 7 years, the fund outpaced its benchmark by a noticeable margin of around 7 percentage points. Even the short-term performance of the fund is encouraging, wherein it has outpaced its benchmark by a wide margin but has trailed some of its peers.

This outperformance has come at a relatively reasonable risk. The fund's Standard Deviation is much lower than that of its benchmark and the category average, whereas it has outperformed many of its peers and the benchmark in terms of risk-adjusted returns (as denoted by the Sharpe Ratio).

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Investment strategy of SBI Small Cap Fund

SBI Small Cap Fund aims to provide investors with opportunities for long-term growth in capital along with the liquidity of an open-ended scheme by investing predominantly in a well-diversified basket of equity stocks of small-cap companies. The fund is mandated to hold a minimum of 65% of its investment in equity & equity-related instruments of small-cap companies (companies ranking 251st onwards in terms of full market capitalisation, as defined by SEBI).

SBI Small Cap Fund follows a blend of growth and value style of investing. The fund looks to invest in high-growth-oriented multi-bagger stocks of small-sized companies but is cautious about the price he is willing to pay for the stock. He also hunts for temporarily beaten-down stocks available at cheap valuations and does not resist from taking a few short-term calls. It follows the bottom-up approach to stock-picking and is selective while choosing companies within the small-cap space.

SBI Small Cap Fund usually holds a fairly-diversified portfolio of about 45 to 50 stocks. As of January 31, 2023, the fund held 52 stocks in its portfolio, reasonably diversified across sectors. Among its top holdings, the fund held exposure to Blue Star, Carborundum Universal, Kalpataru Power Transmission, V-Guard Industries, and Vedant Fashions, among others. The top 10 stocks in the fund's portfolio collectively account for 28.4% of its assets.

In the last two years, SBI Small Cap Fund has benefited immensely from its holdings in Elgi Equipments, Carborundum Universal, Triveni Turbine, Rajratan Global Wire, Timken India, Grindwell Norton, Lemon Tree Hotels, Chalet Hotels, Blue Star, Narayana Hrudalaya, Navin Flourine International, among others.

The major portion of the fund's portfolio is currently inclined towards Engineering (19.5% of its assets), followed by Chemicals, Consumer Durables, and Consumption, with allocation in the range of 9-10% in each. Construction, Retail, Hotels, Auto Ancillaries, and Power are among the other prominent sectors in the portfolio. The fund's portfolio is spread across cyclicals and sensitive sectors, with significant exposure to defensives.

Suitability

SBI Small Cap Fund is one of the well-managed schemes in the small Cap Fund category that has built a solid track record for itself and has rewarded its investors well since its inception. It has a proven track record of timely identifying fundamentally sound stocks in the small-cap space that have turned into multi-baggers and have helped the fund regain its spot among top category performers.

Being a small-cap-biased fund, SBI Small Cap Fund is bound to witness extreme volatility in conditions when the small-cap stocks are under pressure or see a sharp correction. However, the fund's ability to recognise worthy companies at an early stage of development may help it do well in the long run.

Given its penchant for high-risk-oriented small-caps, SBI Small Cap Fund is suitable only for investors having a very high-risk appetite and a longer investment horizon of at least 7 years.

Do note that SBI Small Cap Fund has stopped accepting lumpsum investments with effect from September 07, 2020, in order to avoid capacity constraints. Fresh investment is only accepted through SIP mode and is capped at Rs 25,000 per month per PAN.

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.

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.

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; except for some of the Research Analysts holding units of SBI Small Cap Fund;

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;

4. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However, any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront / annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices.

1. Neither QIS nor it's Associates have received any compensation from the subject Company in the past twelve months;

2. Neither QIS nor it's Associates have managed or co-managed public offering of securities for the subject Company;

3. Neither QIS nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company;

4. Neither QIS nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

5. Neither QIS nor it's Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report

1. The Research Analyst has not served as an officer, director or employee of the subject Company.

2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.

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

Email:info@personalfn.com Website: www.personalfn.com Tel.: 022 61361200 Fax.: 022 61361222 SEBI-registered Investment Adviser. Registration No. INA000000680, SEBI (Investment Advisers) Regulation, 2013