Fund of Fortnight

This is our mutual fund recommendation. Every fortnight , we recommend one open-ended equity diversified fund that has the best potential of returns for the next one year considering its constituents remain the same.

DSP Small Cap Fund - Direct Plan (Growth)

Reason for recommendation

The last six months have seen a lot of volatility in the equity market with a downward bias. The current fall has only aggravated the situation for some categories of the market. Small-cap remains one such category. In fact, it has remained in pain for over two and a half years now. The fall is already one of the steepest and longest in the history of small-cap stocks. It is a scenario well-reflected in funds dedicated to such stocks. Also, the difference between the large-cap and small-cap returns is one of the highest.

Going by history, such divergences do not exist for too long and after such a large underperformance, small-caps will tend to outperform large-caps over the next 18-24 months. Hence, it makes sense to invest in small-cap dedicated funds to gain maximum benefit out of this divergence. One such fund that is poised well to reap the benefit of such divergence is DSP Small-Cap Fund. The fund has been a top performer in its category over the past ten years and exceeds category return by 50 per cent.

One of the reasons for such a sterling performance is the fund’s capture ratio. It has a downside capture ratio of 0.74 and upside capture ratio of 0.82. This means that in a falling market it falls less whereas it gains better than others in a rising market. The fund is well-diversified with 70 stocks and its top 10 stocks account for 35.38 per cent of the portfolio. In terms of sectors, it is overweight on chemicals, healthcare, automobile and textiles as compared to its category. The fund is suited for investors with long-term investment horizon of 3-5 years and a higher risk appetite.