Fund pick: Reliance small cap fund; Good stock picking, timing

Launched in September 2010, Reliance Small Cap Fund is classified under the small and mid-cap schemes of CRISIL Mutual Fund Ranking. It has featured in the top 30 percentile (CRISIL Fund Rank 1 or 2) in the four consecutive quarters ended September 2017.

The fund's month-end assets under management (AUM) more than tripled in the past three years to Rs 4,546 crore in September 2017.

The fund's primary investment objective is to generate long-term capital appreciation by investing predominantly in equity and equity-related instruments of small cap companies. The fund is managed by Samir Rachh.

Consistent outperformance

The fund has consistently outperformed the benchmark (Nifty 500) and its category (funds ranked under the small and mid-cap category in September 2017 CRISIL Mutual Fund Ranking), earning significant margins across periods under analysis.

The fund was not only able to outpace the benchmark and the category during bull runs, but was also able to cushion the losses better during the bear phases except one-off marginal underperformance against the category during the European crisis (January 2011 to June 2013). It captured the recent rally in the equity market better than the category and the benchmark.

An investment of Rs 1,000 in the fund on September 16, 2010 (its inception) would have grown to Rs 4,335 on November 6, 2017 at an annualised rate of 22.84 per cent, surpassing the category and the benchmark which would have grown to Rs 3,190 (17.66 per cent) and Rs 1,760 (8.25 per cent), respectively.

For disciplined investors, mutual funds offer systematic investment plan (SIP) mode of investment whereby investors can invest a fixed amount at regular intervals. 

Reliance Small Cap Fund offered an attractive choice for such an investment as it made substantial gains over the benchmark across the time frames considered, especially in the past five years. 

Portfolio analysis

The fund held 87 stocks across 19 sectors in September 2017. It witnessed increased diversification in the portfolio over time - the number of stocks increased from 55 in October 2014 to 87 currently.

The portfolio comprised 141 stocks in the past three years, out of which 32 have been held consistently. The consistent stocks formed about half of the portfolio on average. Eighteen of the 32 consistently held stocks have outperformed the fund’s benchmark; 14 have more than doubled their value in three years. 

At the sectoral level, chemicals (10.08 per cent exposure over past three years), banks (8.25 per cent), industrial products (8.10 per cent), consumer non-durables (7.89 per cent) were the top constituents in the fund's equity portfolio. The fund manager gradually increased exposure to chemicals over the last one year, and the chosen stocks have picked up performance in the current calendar year. Navin Flourine International (which rose to more than 5x its value), Atul Ltd and Deepak Nitrite placed the chemical sector at the helm of performance contributors. Johnson Controls-Hitachi Air Conditioning India and VIP Industries drove returns in the consumer durables segment. 

The fund manager’s stock picks in the banking sector such as RBL Bank, HDFC Bank and YES Bank led this sector's contribution to performance. Two of the three telecom, equipment and accessories stocks - Sterlite Technologies and Vindhya Telelinks - held by the fund surged more than three times their value in the holding period.

Exposure to the software sector was trimmed, especially in the past one year, as most of the sectoral stocks traded in red. Increased exposure to industrial capital goods boded well for the fund. Timely entries and exits, coupled with the fund manager's conviction in stock picking, worked to the fund's advantage.
CRISIL Research

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel