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Despite their ability to give your portfolio a booster dose of returns, small-cap stocks are a very tricky proposition for most investors. The past year, when small-cap stocks have tumbled in a sideways market, has demonstrated this aptly.
Even as the BSE Small-cap index has lost about 15 per cent in value in the past ten months, the worst performing stock in this index dropped by 75 per cent. Nearly a tenth of stocks in the index also lost 40 per cent or more.
For investors wanting to avoid such bloopers, mutual funds riding on the small-cap theme are good investments. They bring you the return potential of small-caps without subjecting your portfolio to massive damage.
Of the half a dozen funds in this space, DSP BlackRock Microcap Fund is a good choice for its three-year track record, ability to pick quality stocks and its open-end nature. Investors can consider adding this fund to their portfolio now, as small-cap stocks have been beaten down in the recent correction.
Risks : DSP BlackRock Micro-cap Fund is suitable only for investors who are able to stomach the high volatility that comes with small-caps. Returns in this space depend as much on the liquidity situation in the market as on business fundamentals.
The fund's mandate requires a 65-100 per cent exposure to stocks that are not part of the top 300 in the market. About half of its portfolio is invested in stocks with a market cap of less than Rs 1,000 crore.
This makes the fund vulnerable to sharp swings in its NAV. The fund has so far managed downside quite well. In the last year, for instance, the NAV rose 2 per cent, while the BSE Smallcap index fell 6 per cent. Of the peers in this space, only Sundaram Select Smallcap has managed a comparable show. Investors should allocate a fixed portion of their portfolio to this fund.
Investing a lump-sum in this fund should be avoided when market valuations are high.
Performance : DSP BR Microcap sports a very respectable three-year return of 17 per cent, making it in the top fund in its category. The return also compares quite well to the diversified category, despite the forgettable performance of small-cap stocks in this period. The fund has trounced the BSE Smallcap index over 3 as well as 1 year periods.
The fund's portfolio has been quite actively managed, as would be expected of a micro-cap fund. Nearly a fifth of the stocks in the portfolio have been replaced in the last five months, with the exits (Whirlpool, Sundaram Finance, Lumax Auto) suggesting that the fund has been booking profits on a target value being reached.
The fund focuses on quality stocks, even within the small-cap space.
The sector preferences reflect the marked differences between the composition of the small-cap universe and that of the Sensex.
Software was the top sector by May 2011, followed by Indian pharma and FMCG. The fund has raised exposure to sectors such as software, pahrama, fertiliser, textiles and banks in the past six months.
Starting out as a closed end fund in June 2007, the fund went open-ended in June 2010. Though an open-end structure may be tricky to manage for a small-cap fund, this fund has seen steady accretion to its assets over the past year.
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