ARN Number - 143431
Name - Sreenivas Guvvala
AMFI Registered Mutual Fund Distributor
Mutual Fund House - Nippon India
Nippon Indian Small Cap Fund formerly known as Reliance Small Cap Fund is a very popular and old small cap fund.
It is one among the largest mutual fund schemes based on Assets under Management.
Due to its large aum, Nippon India fund house has restricted investments via the lumpsum mode although investments can be made via the sip and stp mode with restrictions.
What is a small cap mutual fund?
A small cap mutual fund needs to invest a minimum of 65% into small cap companies at all times.
These include all companies beyond 250 in terms of market capitalization.
A small cap mutual fund is the most risk prone mutual fund besides thematic mutual funds and yet the most rewarding if you know what you are doing.
This category includes companies that have potential to be multi baggers but also companies that are most likely to be plagued by poor numbers, inefficient management, etc. among other issues.
A small cap mutual fund allows a fund manager a very large pool of companies to choose from unlike a large and a mid cap mutual fund.
Therefore the performance of a small cap mutual fund hinges the most on a fund manager and his ability to avoid certain companies rather than his ability to pick the right companies.
Most investors sadly who invest in a small cap mutual fund do so, either due to its high returns potential or the need to do so for diversification, don’t be one of them.
Categorization of companies
Large Cap: 1st -100th company in terms of full market capitalization
Mid Cap: 101st -250th company in terms of full market capitalization
Small Cap: 251st company onwards in terms of full market capitalization
Understanding the portfolio helps one navigate and understand the functioning of the portfolio.
Even though every small cap fund requires a mandatory 65% allocation towards small cap stocks, every small cap fund allocates and builds the portfolio differently.
Nippon India Small Cap Market Allocation
Small Caps | 71.82 % |
Mid Caps | 13.80 % |
Large Caps | 14.38 % |
As expected, Nippon India Small Cap Fund has a majority allocation towards small cap stocks with not much difference in the allocation towards mid and large cap stocks.
The fund has 251 holdings which should not be seen as surprising since small cap mutual funds usually have a higher number of holdings as compared to other categories of equity mutual fund schemes.
You should also keep in mind that all stocks beyond 250 in terms of market capitalization are termed as small cap stocks.
Therefore, the universe of small cap stocks is vast.
Nippon India Small Cap Sector Allocation
The top 5 sectors are as below:
Industrials
Financial
Consumer Discretionary
Materials
Healthcare
Nippon India Small Cap fund is currently overweight on Industrials & Materials while being underweight on Financial, Consumer Discretionary and Healthcare as compared to the category average.
Click here to read why you should not invest in the best performing mutual funds
Risks and Returns
A very common mistake made by investors with regards to small cap funds is being lured in by the returns.
When in fact a better risk assessment would be to look at periods when the fund has been on the down.
Then consider if you would have stayed invested during such periods, if the answer is no then it is better to avoid small cap funds altogether.
This is because small cap mutual funds tend to be extremely volatile so if you do not have the stomach for prolonged periods of negative returns then it is better to avoid them.
Since small cap mutual funds qualify as equity mutual funds, the same taxation rules that apply to equity mutual funds will also apply to them.
The capital gains tax on it are as follows:
Long Term Capital Gains Tax
Long Term Capital Gains Tax are applicable at 12.50% when you sell units of your scheme after 12 months if the capital gain is 1.25 lakh.
The capital gain below 1.25 lakh is tax free.
Short Term Capital Gains Tax
Short Term Capital Gains Tax is applicable at 20% when you sell your units before 12 months.
There is no indexation benefit for either tax.
When you invest via the sip mode, each instalment is treated as a separate purchase for tax calculation.
Click here to read on how to invest based on your time horizon
Should you invest in a small cap fund?
You can consider a small cap fund if you satisfy the following conditions:
If you have a time horizon of 7 years or more, this is because small caps go through various phases and cycles before which you get any meaningful returns which is why patience and discipline is paramount.
If you have the calmness to stay put during volatile times which is a given with small cap funds and not panic and redeem at the first sign of volatility.
If you want to supplement your core portfolio and diversify your portfolio.
A small cap fund should not be your core portfolio or the only fund in your mutual fund portfolio or take up a major portion of your portfolio.
A small cap fund should work as if you are garnishing a dish and should never be your main course.
ARN Number - 143431
Name - Sreenivas Guvvala
AMFI Registered Mutual Fund Distributor
Mutual Fund House - Nippon India
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
