In February this year, DSP BlackRock Micro Cap Fund stopped accepting fresh investments, both via lumpsum and new SIPs. But existing SIPs could be continued.

The rationale behind non-acceptance of fresh investments was that further large inflows may prove detrimental to the interest of existing unitholders. The fund had benefited from the sharp rally in smaller stocks and seen huge inflows in the prior two-three years.

A swelling corpus brought challenges of liquidity, making it difficult to increase stock weightage to desired levels. There was an increased risk of high impact cost of transactions.

Also, valuations of many small-cap stocks had shot up, resulting in less investment opportunities in the space. Besides, liquidity in smaller stocks can be poor, making it difficult to exit when things turn bad.

The fund has been one of the best performers in the small-cap category, with annualised returns of 30-32 per cent over three and five years, much higher than the 17-20 per cent of the benchmark S&P BSE Small-Cap index. However, its one-year return (about 26 per cent) lags the benchmark and the category.

With a corpus of nearly ₹5,900 crore as of June 2017, the fund is the largest in the small-cap category. The portfolio has more than 80 stocks, most of them small-caps with some mid-caps too, across multiple sectors, from chemicals to domestic appliances.

Stock choices

The large portfolio could help temper some of the risks associated with small-caps, with maximum exposure to a stock being about 3 per cent of the corpus.

Top holdings include KPR Mill, Sharda Cropchem, Repco Home Finance, APL Apollo Tubes, SRF, DCB Bank, Aarti Industries and Atul; exposure to each of these is more than 2.5 per cent of the corpus as of June 2017. The portfolio also includes below-the-radar names such as Fiem Industries, Skipper, NRB Bearings, Triveni Turbine and IFGL Refractories.

Over the past year, the biggest gainers in the fund’s portfolio include IFB Industries, VST Industries and DCB Bank which doubled or more; the fund had increased its holding in these companies. New additions such as Subros and Kalyani Steels have also rallied sharply. Exits such as WABCO were well-timed. Some portfolio moves hurt. For instance, the exit from CEAT in September 2016; the stock has doubled over a year. Also, Navkar Corp, in which the fund increased stake, lost ground over the past year. Overall, the fund’s portfolio has delivered strongly.

Of the 85 stocks in the portfolio, only 13 slipped last year, while nearly 40 stocks gained more than 25 per cent; winners include V-Guard Industries and Suprajit Engineering.

The fund’s investment in new issues such as Advanced Enzyme Technologies and SP Apparels has done well; CL Educate though lost ground. The fund added 26 stocks to its portfolio last year while exiting five.

Over the past year, the fund cut holdings in software while upping stake in pesticides and agrochemicals. It added textile, paper and food processing stocks.

After upping cash allocation from about 5 per cent of the corpus in May 2016 to 8 per cent in February this year, it was reduced to about 3.5 per cent as of June 2017. More than 96 per cent of the corpus is now in equities.

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