Is Franklin India Smaller Companies Fund Worth Your Money - Outside View by PersonalFN

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Is Franklin India Smaller Companies Fund Worth Your Money
Aug 2, 2018

After a tremendous rally over the last few years, Small caps have finally entered the list of laggards. The S&P BSE Small Cap index has lost about 23% in value (as calculated on 25th July 2018) from its peak in January 2018.

This makes the claim stronger that small caps are not every ones cup of tea. It really needs expertise to identify the right bets in the small cap space or else one may soon find himself on the back foot, with substantial loss in capital.

Small cap universe being fairly under researched, the stocks in this space tend to easily lose sentiment and are hit harder in difficult economic conditions. Moreover, the perception that a slowdown will hit the earnings of small sized companies more even puts a question mark on their survival. On the other hand, larger companies have a much better chance of surviving in difficult times.

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However, small caps have the ability to steal the show when the stock market's rebound for a longer rally. But one surely needs to select right and quality small cap stocks, as not every small cap stock may turn out to be multi-bagger. The costs of going wrong may be extremely higher.

Mutual funds focusing on small-caps may be an ideal choice for retail investors who would like to explore the money making potential in this space, although at a higher risk level. Even though the number of funds in the small cap category is small, each has their own pros and cons.

Franklin India Smaller Companies Fund is one such fund with a mandate to invest in stocks of small sized companies. Positioned as a predominant small cap fund, the fund primarily focuses on investing predominantly in small cap companies. However, it has been investing predominantly in small caps and mid-caps along with a nominal investment into large caps.

The strong investment processes, astute stock picking and sound risk management systems followed at Franklin Templeton Mutual Fund have contributed to the stability in its performance across market conditions. The popularity of the fund can be known from its size of over Rs 7,000 crore, which is huge for a typical small cap fund. No wonders, it is currently the largest fund in the small cap funds category.

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Investment Objective of Franklin India Smaller Companies Fund

Franklin India Smaller Companies Fund holds an objective of providing long-term capital appreciation by investing in small cap companies.

Fund Details: Franklin India Smaller Companies Fund

Fund Facts
CategorySmall cap FundStyleGrowth
TypeOpen ended schemeMarket Cap BiasSmall Cap Fund
Launch Date13-Jan-06SI Return (CAGR)14.75%
Corpus (Cr)Rs 7,114Min./Add. Inv.Rs 5,000 / Rs 1,000
Expense Ratio (Dir/Reg)0.9% / 2.15%Exit Load1%
Portfolio Data as on June 30, 2018.
SI Return as on July 24, 2018.
(Source: ACE MF)

Franklin India Smaller Companies Fund is mandated to invest-

  • 65% - 100% in equities and equity linked instruments of Smaller Companies
  • 0% - 35% in equities and equity linked instruments of other Companies
  • 0% - 35% in debt and money market instruments

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SEBI has defined small caps as stock of companies beyond the 250th company on full market capitalisation basis.

Growth Of Rs 10,000, If Invested In Franklin India Smaller Companies Fund 5 Years Ago

The historical 5 year performance of Franklin India Smaller Companies Fund shows that Rs 10,000 invested in the fund 5 years back, would now have appreciated to Rs 34,850. A simultaneous investment of Rs 10,000 in the benchmark Nifty Smallcap 250 - TRI index would have grown to Rs 29,269. With a CAGR of around 28%, Franklin India Smaller Companies Fund has outpaced its benchmark by a significant margin and has generated an alpha of 4% over its benchmark (24% CAGR).


Franklin India Smaller Companies Fund: Year-on-Year Performance

Launcehd way back in January 2006, Franklin India Smaller Companies Fund has a track record of over a decade. The fund has not been a solid bull market performer, but it has made its presence felt during the years of crisis. The year-on-year performance comparison of the fund vis-a-vis its benchmark shows that the fund has outperformed the benchmark in 8 out of the last 10 calendar years. Both its underperformance came during the years when the small caps registered a substantial rally.

Franklin India Smaller Companies Fund: Performance Vis-a-vis Category Peers

Rolling Period Returns
Scheme NameCorpus
(Rs Cr)
1 Year (%)2 Year (%)3 Year (%)5 Year (%)Std DevSharpe
SBI Small Cap Fund792 42.6932.0528.0337.1018.470.17
L&T Emerging Businesses Fund4,934 37.5535.4826.100.0017.530.23
Reliance Small Cap Fund6,696 35.6031.3624.3836.9619.370.18
Aditya Birla SL Small Cap Fund2,182 27.3729.0423.0728.4517.740.16
HDFC Small Cap Fund4,143 36.3830.2921.9525.6816.510.21
DSPBR Small Cap Fund5,255 17.7023.2621.6233.1818.250.08
Franklin India Smaller Cos Fund7,114 22.3824.0419.7830.9314.620.15
Kotak Small Cap Fund804 20.7823.3018.8725.2415.740.10
HSBC Small Cap Equity Fund575 27.3624.0818.4828.6220.920.07
Sundaram Small Cap Fund1,173 23.5422.0216.8728.6621.410.04
ICICI Pru Smallcap Fund163 20.6120.0412.5219.1115.72-0.01
Union Small Cap Fund305 20.1016.6911.370.0016.74-0.01
Nifty Smallcap 250 - TRI 25.2324.2816.9024.0020.560.07
Returns are on a rolling basis and those depicted over 1-Yr are compounded annualised.
Data as on July 24, 2018
(Source: ACE MF)

*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

Franklin India Smaller Companies Fund has been an average performer. Although the fund has managed to beat the benchmark over longer time period, it is not a big return generator when compared to the kind of returns delivered by its other small cap peers. However, its ability to limit the downside during gloomy and uncertain market conditions is something that differentiates the fund from the rest. Against a 23% fall in the S&P BSE Small cap index in the last 6 months (15-Jan-2018 to 25-July-2018), the fund is down about 12%. Franklin India Smaller Companies Fund possesses the lowest standard deviation in the category, which confirms its penchant towards risk management over returns. The lower risk taken by the fund has helped it outperform many of its peers in terms of risk-adjusted returns.

Investment Strategy of Franklin India Smaller Companies Fund

Having a mandate to invest in small-cap stocks, Franklin India Smaller Companies Fund aims to identify companies that have the potential to become future leaders. The fund is mandated to invest 65%-100% of its assets into equities of small cap companies, while 0-35% in other companies. Historically, the fund has not limited its exposure to only small caps, but has carried significant allocation to mid caps as well, along with up to 15% allocation towards large caps. Despite being a small cap fund, it has operated more like a mid and small cap contender. While the conservative strategies cost the fund during bull market rallies, it has definitely helped keep its risk under check and turned out to be rewarding during bear market phases. However, with the new definition kicking in, the fund is expected to raise its allocation in small caps to at least 65% of its assets.

In terms of stock picking, Franklin India Smaller Companies Fund is driven by processes and depends predominantly on bottom up approach to pick quality stocks for its portfolio. While managing the portfolio, the fund managers follow an active investment strategy taking defensive/aggressive postures in smaller companies depending on the opportunities available at various points in time. Franklin Templeton as a fund house gives high weightage to risk management over return generation. It is not a bull market fund house, but is known to stand out during bear market phases.

Franklin India Smaller Companies Fund - Portfolio Allocation and Market Capitalisation Trends

Despite being a small cap fund, the portfolio of Franklin India Smaller Companies Fund has been diversified across marekt caps. Along with small caps, it has held significant allocation to mid caps. The large cap holdings in its portfolio has been limited to about 15% of its assets. However, post implementation of recategorization norms, the fund managers have been gradually shifting the weigtage towards small caps, while cutting down the exposure to mid caps. As on June 30, 2018, the fund held an exposure of 36.8% in small-caps, 40.3% in mid -caps and about 14.9% in large caps. Notably, in the beginning of the year, the mid cap allocation in the fund's portfolio was about 55%, while small caps was just around 23% of its assets.

Franklin India Smaller Companies Fund - Top Portfolio Holdings

Top 10 Stocks
Stocks% of Assets
Finolex Cables Ltd.3.31
Vardhman Textiles Ltd.2.84
HDFC Bank Ltd.2.66
Repco Home Finance Ltd.2.59
eClerx Services Ltd.2.38
Infosys Ltd.2.28
Cyient Ltd.2.10
Nesco Ltd.2.05
Karur Vysya Bank Ltd.2.01
Dr. Lal Pathlabs Ltd.1.99
Top 5 Sectors

Franklin India Smaller Companies Fund holds a well-diversified portfolio of about 65-75 stocks. The fund makes well use of diversification for risk management. Moreover the large size of the fund is another factor that has enforced the increase in number of tail-enders in the portfolio. About 21 out of 72 stocks in its portfolio have a weightage of less than 1%.

Among stocks Finolex Cables, Vardhman Textiles, HDFC Bank, Repco Home Finance and eClerx Services appear in the list of top 5 holdings in its portfolio. The existence of large cap names like HDFC Bank and Infosys in the portfolio is an eyebrow raiser for investors who have been investing in the fund for the thirst of small caps. It is to be seen, if the fund managers will do away with such large names to make it a true to mandate small cap fund in the new categorization era.

Construction, Banks, Financials, Software and Engineering dominate the fund's portfolio at present, together accounting for about 42% of its assets. Consumption, Chemicals, Media and Pharma are amongst the next top bets in the funds portfolio with a weightage of 3% to 5%.

Suitability of Franklin India Smaller Companies Fund

While small cap funds have the ability to earn higher returns, on the flip side they carry greater potential of loss as well. This feature makes small cap fund suitable only for very aggressive investors seeking to boost their portfolio with extra-ordinary returns generated by small caps. Eyeing for long term wealth creation, one should have an investment horizon of at least, while investing in small cap funds.

Unlike its small cap peers, Franklin India Smaller Companies Fund is inclined more towards risk management rather than return generation. Strong investment processes, astute stock picking and sound risk management systems have contributed to the performance of the fund. Being a cautiously managed small cap fund, Franklin India Smaller Companies Fund is suitable for investors looking for long term wealth creation through small caps, but with some element of stability. This fund may not be the best bet for those anticipating extra-ordinary return potential of small caps.

Note: This write up is for information purpose and not a recommendation to buy or sell the mutual fund scheme. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your financial planner or investment advisor.

Editor's note:

PersonalFN's research states that 60% of the portfolio should be reserved for Core mutual funds and the balance 40%, for the Satellite mutual funds.

But what matters the most is the art of cleverly structuring the portfolio by assigning weights to each category of mutual funds and the schemes picked for the portfolio.

Also, when there is a change in market outlook, revisiting the strategically structured portfolio by reviewing assigned weights to funds, is important.

And now that markets have hit a new peak, holding a Strategically Designed Mutual Funds Portfolio would be even more worthwhile.

Click Here to know more about PersonalFN's exclusive Strategic Portfolio For 2025.

Vivek Chaurasia

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Is Franklin India Smaller Companies Fund Worth Your Money". Click here!

1 Responses to "Is Franklin India Smaller Companies Fund Worth Your Money"

KD

Aug 2, 2018

Asset size of this fund is huge. In small cap and micro cap there is liquidity problem. This is the reason many very rich business people made money in small caps.

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