Sebi requested Asset Management Companies which manage mutual funds to disclose certain parameters related to liquidity, risk and turnover as well as client holdings every month for mid and small cap schemes. Reports are available for these schemes for the months from February to April 2024. We had recently analysed the parameters for mid cal schemes. Our observations on the parameters disclosed for small cap schemes are as under:
Exposure to small cap stocks
Small cap schemes need to have a minimum 65% exposure to small cap stocks. These stocks rank 251 to 500 in the list declared by AMFI every month. The largest small cap stock had a market capitalisation of Rs 22,127 crs on an average in the six months period ended December 31, 2023. The 500th stock in the list had a market cap of Rs 7,314 crs. The largest small cap fund is Nippon India Small Cap Fund with assets of Rs 50,413 crs in April 2024 and the smallest fund managed Rs 47 crs.
The Tata fund has the largest exposure to small companies at 93%. Four funds had an exposure of more than 87% to smaller companies. The fund with the least exposure at 64.9% is ITI Fund and ICICI Pru, Motilal Oswal and Quant had exposures to small caps less than 70%. The largest exposure to large cap stocks was of Quant at 26.95%. Nippon, Mahindra and ITI had large cap exposures of more than 10%. The largest amount of cash was with ICICI at 10.64% followed by Bandhan at 10.38%. There are funds will cash levels
less than 2%. One would expect AMCs to have less exposure to large caps and more to mid caps given that investors are looking for a high risk reward ratio.
Holdings concentration
ITI had the largest holdings of the top ten investors at 20% followed by Mahindra, Motilal and Bandana in the early tens. You will recall that having high concentration is not good but one must also consider the overall size of the fund. These funds are not too large and should be able to manage their liquidity.
Liquidity
HDFC will take the maximum number of days (54) to liquidate half its portfolio of Rs 29,600 crores whereas the largest Fund Nippon will take 31 days only. SBI will also take 48 days to liquidate half of its Rs 27,700 crs assets. Kotak with 14,800 crs of assets will also take 35 days which is higher than Nippon. If you are the type who will redeem then these numbers are important for you.
Risk Parameters
Quant has the highest standard deviation at 19.2% and the highest portfolio turnover ratio at 1.52 times. Motilal and bandana have single digit standard deviation and low turnovers too.
- Choose funds which have high liquidity (ie those funds who can sell their portfolio in the lowest number of days)
- Funds with less concentration of clients are better. We have seen with debt funds that the smartest investors are the first to redeem leaving the rest with all the ill-liquid assets.
- Choose funds with low standard deviation and low portfolio turnover ratios. It’s a pity that Sharpe ratios are not disclosed here. But higher the Sharpe ratio, better is the fund.
- Choose your fund carefully. Some of the funds are small and large cap funds and some are small and mid cap funds. If you already have a large cap exposure, choose funds with high small and mid cap exposures.
The link to the AMFI report on small cap schemes for April 2024 flows is below:
