Small, mid-cap funds speed past other equity categories

As per our analysis, among various categories of equity mutual funds, small and mid-cap funds were standout outperformers, across periods analysed (see table). They were also able to generate double-digit positive returns over the last one year, compared with negative performance or abysmal returns generated for other categories. All equity mutual fund categories, however, beat the market benchmarks across periods analysed.

Within these categories, small and mid-cap funds allow investors to seek exposure to small and mid-cap stocks, which offer good wealth creation opportunities over the long-term (7-10 years), given their potential to grow faster than large-cap stocks. An analysis of Crisil-ranked small & mid-cap funds reveals investments in small & mid-cap stocks in the range of 63-99% over last three years, ending November 2015. Funds with higher exposure to these stocks have performed better than ones having lower exposure. Stock selection played a decisive role in helping the category generate alpha. Portfolio analysis shows the top 26 stocks - covering around 25% of assets - gave an average 34% compounded annualised growth rate (CAGR) over the three-year period ended November 2015, compared with only 12% CAGR for large cap funds.

Stocks that made a significant contribution to gains (weighted average of exposure and returns) in small & mid-cap funds include – Page Industries (76% CAGR), Bajaj Finance (61% CAGR), Torrent Pharmaceuticals (58% CAGR), Aurobindo Pharma and Amara Raja Batteries (57% CAGR each).

Rs 1,000 invested in October 2004 in small & mid-cap funds would have grown to Rs 7,794 on November 30, 2015, compared with Rs 5,701 in large cap funds.

Investors should note that though this category is an attractive investment option, it is riskier than other broad-based categories. For instance, they have performed well during most market phases, in comparison with their benchmarks – Nifty Midcap 100 and Nifty Smallcap 100 and other equity categories – large cap and diversified equity funds. However, it must be noted that performance of such funds is exceptional during bull phases, but turns lacklustre during bearish phases. Hence, a risk return profile mapping and due diligence is a must before proceeding further.

As per our latest mutual fund ranks (September 2015), DSP BlackRock Micro Cap Fund, Canara Robeco Emerging Equities and Mirae Asset Emerging Bluechip Fund were ranked 1 in the small and mid-cap category, representing very good performance within the peer set.

The writer is director, Crisil Research