Mutual Funds

This small-cap player delivers consistently

K Venkatasubramanian | Updated on September 09, 2018 Published on September 09, 2018

The small-cap fund takes a blended approach to buying into value and growth stocks

The steep correction in small- and mid-cap stocks over the past six months means there is a significant opportunity for investors to bet selectively and gain over the long term.

Franklin India Smaller Companies (Franklin Smaller) Fund will be a good option for investors with a reasonable risk appetite seeking above-average returns over a 5-10-year time-frame.

Buying the units of the scheme through the SIP route is advisable as that would allow you to average the costs and ride out the volatility in the markets.

Franklin Smaller has consistently beaten its benchmark — Nifty Smallcap 250 TRI — over one-, three- and five-year periods. Over time-frames of five-plus years, the margin of outperformance has been 3-8 percentage points. In the past five years, the fund’s annual returns were healthy, at nearly 31 per cent.

This return places it above peers such as Kotak Small Cap, Sundaram Small Cap and ICICI Pru Smallcap.

By taking a blended approach to buying into value and growth stocks, Franklin Smaller has been able to participate in market rallies quite well. The fund also takes cash calls to somewhat insulate itself during corrective phases.

Going with quality

Franklin Smaller takes a fairly diffused approach to individual holdings in the portfolio. Individual stocks account for less than 2-4 per cent of the portfolio. The fund holds as many as 75 stocks across market cycles, thus making the portfolio quite diversified and non-concentrated.

While nearly half of the fund’s equity holdings are in small-caps, mid-caps, too, form a significant portion — nearly a third of the portfolio. The scheme also holds a small portion in large-caps.

Franklin Smaller takes cash position to the extent of 10 per cent of the portfolio, depending on market conditions.

Finolex Cables, Cyient, VIP Industries, Shankara Building and Repco Home Finance are some prominent quality names that figure in the portfolio. There is also a mix of growth and value picks. Voltas, HDFC Bank and Infosys are a few large-cap stocks in the portfolio.

Over the past 2-3 years, the fund has also reduced concentration in any one sector, with individual segments accounting for only around 10 per cent in the recent months. Banks and industrial products have consistently been the top sectors held by the fund. Construction, media and software have also figured among the key sectors in which Franklin Smaller has invested in.

Though there is a tilt towards cyclicals in the portfolio, it is somewhat balanced by defensive bets and cash positions.

The fund can be the core part of an investor’s portfolio and is suitable for saving towards goals that are 7-10 years away. Despite bearing the small-cap tag, the fund’s risk levels are reasonable. The returns delivered thus far have certainly compensated for the associated risks.

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