Small-cap mutual funds provide an attractive option for investors seeking high growth potential through investments in emerging companies. Among the popular choices in India, the Nippon India Small Cap Fund and the HDFC Small Cap Fund are known for their focus on small-cap stocks, aiming to capitalize on the growth potential of smaller companies. Here’s an in-depth look at the Nippon India Small Cap Fund and the HDFC Small Cap Fund portfolios, along with factors that differentiate them.
Portfolio Composition
Equity Allocation
Both funds predominantly invest in equities, with a significant portion allocated to small-cap stocks. However, they also include a small percentage of mid-cap and large-cap stocks for added diversification.
- Nippon India Small Cap Fund: Approximately 95.94% of its portfolio is in equities, with 51.47% in small-cap stocks, 12.18% in mid-cap stocks, and 6.58% in large-cap stocks. This allocation shows a strong focus on small-cap stocks, while also maintaining some exposure to mid and large-cap stocks for risk mitigation.
- HDFC Small Cap Fund: Around 93.25% of its portfolio is invested in equities, with 68.96% in small-cap stocks, 3.45% in mid-cap stocks, and 3.12% in large-cap stocks. HDFC Small Cap Fund allocates a higher percentage to small caps compared to Nippon India Small Cap Fund, focusing more directly on companies with high growth potential in the small-cap sector.
Top Holdings
Both funds emphasize selecting companies with growth prospects and sound fundamentals. Here’s a look at some of the top holdings in each portfolio:
- Nippon India Small Cap Fund: The fund’s major holdings include Firstsource Solutions Ltd. (5.45%), eClerx Services Ltd. (1.11%), and HDFC Bank Ltd. (1.19%). These holdings show a preference for companies in the IT services sector, aligning with the fund’s strategy of investing in growth-oriented industries.
- HDFC Small Cap Fund: This fund also holds Firstsource Solutions Ltd. as a top holding, along with other firms in IT and services sectors. The fund managers focus on sectors that have shown resilience and growth potential, especially within the small-cap space.
Sector Allocation
Sector allocation is a crucial component of any mutual fund strategy, as it indicates the industries where the fund managers see potential for growth.
- Nippon India Small Cap Fund: This fund has significant exposure to sectors like IT-enabled services, specialty chemicals, and consumer electronics. The fund’s focus on technology and chemicals sectors highlights its strategy of capitalizing on emerging industries that are seeing rapid growth.
- HDFC Small Cap Fund: The HDFC Small Cap Fund also focuses heavily on IT-enabled services and specialty chemicals, with additional allocations to sectors like engineering and healthcare. This fund’s sectoral choices reflect a balance between high-growth industries and sectors with more stability, which can help reduce volatility in returns.
Risk and Return Profile
Small-cap funds are generally high-risk, high-return investments. Both Nippon India Small Cap Fund and HDFC Small Cap Fund carry a high level of risk due to the volatility associated with small-cap stocks. However, the potential for higher returns makes these funds attractive to investors with a long-term horizon and a higher risk tolerance.
Recent performance data indicates that both funds have delivered strong returns:
- Nippon India Small Cap Fund: Over the past year, this fund has achieved a return of approximately 37.34%, reflecting its successful stock-picking strategy in high-growth sectors.
- HDFC Small Cap Fund: In the same period, the HDFC Small Cap Fund has returned about 32.83%, showing its capability to generate competitive returns despite market fluctuations.
The Nippon India Small Cap Fund and HDFC Small Cap Fund both offer strong opportunities for investors looking to gain exposure to small-cap stocks. While they share similar strategies in many respects, subtle differences in sector allocation, equity distribution, and investment focus can influence performance and risk. Investors should consider these distinctions carefully, along with their own financial objectives, before choosing the fund that aligns best with their goals.
