Want to bet on smallcaps? Try these 3 funds: Dhirendra Kumar, Value Research

Birla Sun Life Small Cap Fund, Axis Smallcap which has turned big and is trying hard to remain a smallcap fund and Franklin India Smaller Companies Fund which has been the most consistent, said Dhirendra Kumar, CEO, Value Research, in an interview with ETNOW.

Edited excerpts:

Is this the right time to seriously start looking at some of the midcap, smal cap funds?
Yes. Though the smallcaps and midcaps are not meant for all kind of investors, but there is always a best time. Investors tend to do the other way round. Investors are always very excited after these stocks have done very well. If you look at the flows in small and midcaps, it is always after the story is over or if it is getting close to being over, that investors get in.

In times like this, investors are anxious and are only waiting to pull out. The returns have been ranging between minus 6% and minus 10% over the last one year. The worst fund meanwhile, has actually given a return of 20% annualised, 100% absolute over the last five years. That is quite phenomenal and reflects what to expect. Even if you look at long-term returns, the smallcap, midcap and the largecap returns converge in a range if they are able to outperform by 1% or 2%.

I would say that for investors to optimise their own returns, they should have a very defined allocation to mid and smallcaps. It is not meant for all kind of investors and investors must be regular. It sometimes gets extremely difficult for even investors with a very strong stomach to withstand the carnage.

You have traditionally never been a fan of taking concentrated bets. So, irrespective of the market wave turning bullish when it comes to the broader caps, would you still say keep investment in small and midcaps balanced? Does it mean that you omit your largecap exposure?
Smallcap funds or midcap funds are not meant for all investors. Only two sets of investors should be investing and with a different orientation. Investors who have five years of regular investing temperament should only invest as would investors who have experience of market. Anybody who starts new and starts with the small and midcaps -- as did most investors in 2017 -- can find it extremely disappointing.

Also, one should overcome the timing instinct. It is not meant for all investors, only a few investors who have that long-term orientation as well as experience to withstand any downside.

A lot of these midcaps and smallcaps are already incredibly beaten down. If one is getting into some of these funds at a time like this, is there a near-term upside even if that means two to three years from now?
The jury is still out. There could be outliers, there could be sectors, there could be specific companies but the midcap and small cap universe is very large. If you look at the Sebi classification, you have thousands of companies to choose from and you can go almost anywhere.

There is another viewpoint to the story. I was talking to a fund manager who is managing a large amount of money, perhaps the biggest individual asset manager and he said that the midcap carnage train has started from Mumbai for Delhi and it has just reached Ratlam so far. It has a long way to go on the downside. So, I do not know and there will be all kind of view points but one thing is certain, small and midcaps are not meant for big bets by individual investors.

When it comes to small and midcap funds, what are the three top names?
There are plenty to choose from when it comes to somebody taking a very opportunistic bet here. I would say that the most beaten down tend to be because we see the reversal to mean, the degree of cyclicality. The ones which I still like are Sundaram Smile Fund, which is nowhere on the rack and we keep getting in fact surprises in these two categories. When we look at the large cap or the multi-cap or the large fund which is a multicap fund, they tend to look alike but here is a fund where every fund manager looks different and they succeed with their different strategies.

We do not see any commonality here. So, I would say even consider the ones which are not the top rated funds and beaten down ones.

Any names that you can think of when it comes to these funds even though they may not be top rated ones?
Look at the diverse funds which had a great time as well the Birla Sun Life Small Cap Fund. Then there is Axis Smallcap which has turned big and it is trying hard to remain a smallcap fund. That is a compelling performance and the most consistent has been Franklin India Smaller Companies Fund.