Reliance Small Cap: A small-cap fund that also contains losses

Investors with a horizon of 7+ years can buy the fund’s units through the SIP route

Rarely does a small-cap fund ensure participation in all rallies and also protect downsides during corrections, across cycles. Reliance Small Cap is one such scheme that has fulfilled these conditions consistently.

Investors with a horizon of seven-plus years can buy units of the fund through the SIP route — the scheme stopped lump sums from March. In any case, it would be better if a mid- or small-cap fund is bought on a periodic basis, rather than as a lump sum, given the inherent volatility of stocks in the space.

Over one-, three- and five-year time-frames, Reliance Small Cap has outperformed its benchmark — BSE Small Cap TRI index. The extent of outperformance vis-à-vis its benchmark has been to the tune of 5-10 percentage points.

The fund has delivered compounded annual returns of nearly 37 per cent over the past five years, higher than peers such as DSP BlackRock Small Cap, Franklin India Smaller Companies and Aditya Birla Sun Life Small Cap.

Over the past seven years, the scheme has consistently been among the top few funds in its category.

By maintaining a well-diversified, non-concentrated portfolio, and by taking cash calls during volatile periods, Reliance Small Cap has been able to deliver outperformance over the years.

Investors with above-average risk appetite can consider buying units in the fund for superior returns.

Low-risk holdings

Reliance Small Cap takes a fairly diffused approach to individual holdings in the portfolio. Individual stocks account for less than 3 per cent of the portfolio. The fund holds as many as 70-80 stocks across market cycles, thus making the portfolio quite diversified and non-concentrated. Exposure to individual sectors, too, is mild, usually less than 10 per cent.

The scheme takes cash and debt positions to the extent of 7-9 per cent of the portfolio, which prevents erosion in the fund’s NAV during corrections.

Reliance Small Cap does not load up on banks and financial services companies like a typical mutual fund does.

In fact, these sectors feature down the priority list, which, in a way, has worked to the fund’s favour, given the turmoil in the segments.

It earlier took exposure to capital goods and chemicals stocks and benefited from the rally in those spaces.

In the last one year, it has upped stakes in consumer non-durables and consumer durables — many stocks in these segments have had a steady rally.

The stock picks are a mix of momentum and value strategies. But most companies in the list are quality names. VIP Industries, Zydus Wellness, RBL Bank, Cyient, Tejas Networks and LG Balakrishnan are some picks that feature prominently in the fund’s portfolio.

Staying invested in the fund through the systematic route over the long term is quite likely to generate superior returns.

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