Mutual Funds

For those with a high penchant for risk

Yoganand D | Updated on May 20, 2018 Published on May 05, 2018

Despite a short track record, its category beating performance has been noteworthy

 

Following a spectacular rally in 2017, small-cap stocks corrected between January and March this year. While investing in small-cap stocks is risky in choppy markets, investors with a higher penchant for risk can set aside a portion of their assets in such funds to spice up their portfolio returns. Over a longer horizon, top funds in the category have delivered healthy returns for investors.

L&T Emerging Businesses Fund that predominantly invests in small-cap stocks has a limited track record. It was launched in May 2014 as a close-ended fund, and subsequently got converted into an open-ended equity scheme in 2016. It has since started drawing investor attention as is evident from the significant increase in its AUM. While the fund has a short track record, its category-beating performance over the past three years is noteworthy. Investors can make use of the SIP route to mitigate volatility.

Performance and strategy

Over one- and three-year periods, L&T Emerging Businesses has delivered gains of 24 per cent and 27 per cent, respectively, beating the category average returns by a margin of 5-6 percentage points. In these periods, it has also outperformed the benchmark — S&P BSE SmallCap TRI. The fund is well-diversified and its portfolio is scattered across 80 stocks and 26 sectors. Industrial products, finance and chemicals are the top three preferred sectors.

It is overweight on construction projects, industrial capital goods, telecom, auto ancillaries and textiles; underweight on sectors such as financials, healthcare, consumer staples and energy. Interestingly, it has unearthed multi-baggers over the past two years — The Ramco Cements, Carborundum Universal, Rane Holdings, Future Lifestyle Fashions and Future Retail. Apart from these stocks, some of the other key stock holdings are Swaraj Engines, Techno Electric & Engineering Company, Indian Hume Pipe, Triveni Turbine, Tube Investments, TVS Srichakra and KPR Mill.

 

Fundas
  • Category outperformer
  • Wide number of stocks diffuses risk
  • Well-diversified across sectors

SEBI guideline changes

L&T Emerging Businesses will be categorised as a small-cap fund following the SEBI circular on mutual funds.

While there is no change in name, there is a bit of an alteration in the mandate.

Until now, the fund’s mandate had a minimum investment requirement of 50 per cent in small-cap stocks. This changes to 65 per cent.

Also, SEBI has now clearly defined large-, mid- and small-cap stocks. Small-cap stocks will comprise those ranked beyond 250 based on full market capitalisation.

Earlier, as per the fund’s mandate, small-cap stocks were beyond the top 200 companies.

This slight re-jig could lead to some adjustment in the fund’s portfolio.

For instance, The Ramco Cements and Future Retail fall in the mid-cap category as per the list of stocks published by the Association of Mutual Funds of India (AMFI) following the SEBI circular.

That said, sharp changes in the fund’s performance or portfolio is unlikely.

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