LIC MF Small Cap Fund: A promising small cap fund

Market context

Small caps have outperformed ever since the market started recovering after the COVID-19 crash in 2020. Small caps outperformed in CY 2020 and 2021, but they underperformed in CY 2022. The 2022 correction made small caps attractive and they bounced back strongly in 2023. On a YTD basis, Nifty Small Cap 250 TRI gave more than 20% return, while Nifty 50 TRI has given 7.5% return (source: NSE, Advisorkhoj Research, as on 18^th August 2023). Naturally, there is huge investor interest in small cap funds. As per AMFI monthly data, small cap funds have received the largest inflows among all equity fund categories in FY 2023 – 24 as on 31^st July YTD.

Source: National Stock Exchange, Advisorkhoj Research, as on 18^th August 2023

What are small cap funds?

Stocks, i.e. stocks below the top 250 stocks by market capitalization, are classified by SEBI as small cap stocks. Small cap funds are equity mutual fund schemes which invest at least 65% of their assets under management (AUM) in small cap stocks.

Why small cap stocks / funds tend to outperform large cap stocks / funds?

• Small cap stocks have smaller revenue base compared to large caps. As a result, small caps have the ability to grow revenues and earnings much faster than large caps.


• Since small cap stocks are under-researched and under-owned by the by institutional investors, the price discovery in this market cap segment is not as efficient as large caps or even midcaps. As a result, fund managers of small cap schemes have far greater opportunities of identifying small cap stocks which are currently undervalued in the market (relative to their fair valuations). These stocks can generate considerable alpha relative to the broader market.


• Also stocks that are small cap today have the potential of becoming midcap stocks in the future. When a stock moves from one market cap segment to the higher market cap segment, valuation rerating occurs. This can result in small cap stocks giving multi-bagger returns.


• The universe of small cap stocks is much larger than large cap (total 100 stocks) and midcap stocks (total 150 stocks). Large cap stocks are concentrated in relatively few industry sectors. Sectors like chemicals, packaging, sugar and tea, ceramics and sanitary ware, hotels, logistics and construction can be played better through small cap stocks.

LIC MF Small Cap Fund

LIC Mutual Fund is a Public Sector Undertaking (PSU) Sponsored asset management company (AMC) with stakeholders LIC of India, LIC Housing Finance Ltd, GIC Housing Finance Ltd and Union Bank of India. The AMC was established in 1989; one of the first AMCs to be established when the Government wanted to bring in more players in mutual fund industry after more than 2 decades of monopoly of Unit Trust of India. LIC MF offers a complete basket of products covering ETF, Debt, Equity, Hybrid, Passive and Solution oriented themes. LIC has built a brand that is synonymous to trust. LIC Mutual Fund, under the aegis of LIC of India, strives to achieve a similar level in the Mutual Fund Industry.

LIC MF Small Cap Fund was launched in June 2017. The scheme has Rs 171 crores of AUM as on 31^st August 2023 The Total Expense Ratio (TER) of the scheme is 2.51%. The scheme has given 12.5% return since inception. Yogesh Patil and Dikshit Mittal are the fund managers of the scheme since 31^st July 2023. The scheme’s benchmark is Nifty Small Cap 250 TRI.

Wealth Creation through SIP

The chart below shows the growth of Rs 10,000 monthly SIP investment in LIC MF Small Cap Fund since the inception of the scheme. With a cumulative investment of Rs 7.50 lakhs, you could have accumulated a corpus Rs 14.43 lakhs by investing through SIP in this scheme. The annualized SIP returns (XIRR) of the scheme is over 21%. The SIP performance of the scheme, again demonstrates the wealth creation track record of LIC MF Small Cap Fund.

Source: National Stock Exchange, Advisorkhoj Research, as on 18^th August 2023

Investment strategy of LICMF Small Cap Fund

• The investment strategy of the Scheme involves constructing awell-diversified portfolio of companies predominantly from the smallcap universe.


• The fund managers will adopt a combination of top-down and bottom-up approaches for portfolio construction.


• The investment philosophy focuses on growth at reasonable prices (GARP) by evaluating companies across fundamental parameters like competitive position, earnings growth, management quality, promoter track record, future plans, valuation corporate governance, sustainable cash flows etc.

Why invest in LICMF Small Cap Fund?

• After a deep correction last year, small caps have bounced back strongly. Forward PE ratios of small cap stocks are attractive for long term investors


• Inflation has cooled considerably and interest rates seem to have peaked. There are signs of consumption growth picking up.


• Historical data shows that small cap stocks and funds have outperformed large cap stocks and funds over long investment tenures


• Small cap companies tend to show stronger earnings growth vis-a-vis mid and large cap companies, when there is an economic recovery after a prolonged period of business sluggishness


• Small cap stocks are likely beneficiaries of a number of policy reforms enacted by the Government, digitalization and shift from unorganized to organized sector and have a great potential in the consumption driven India growth story.


• LIC MF Small Cap Fund had underperformed in the past few years relative to its peers, but in line with the turnaround in performance of other LIC MF schemes in the last few months / quarters, we expect a turnaround in LIC MF Small Cap Fund led by fund managers, Yogesh Patil and Dikshit Mittal.


• The relatively small AUM base of LIC MF Small Cap Fund may work to the scheme’s advantage when markets are at all time high.


• The investment strategy with its focus on GARP is sound and has the potential deliver good performance in current market conditions over sufficiently long investment horizon

Who should invest in LIC MF Small Cap Fund?

• Investors looking for capital appreciation over long investment horizons


• Investors with high risk appetites


• Investors with minimum 5 year investment horizons


• We think that SIP is the best mode of investment midcap funds over long investment horizons.


• However, investors can also take advantage of deep corrections to tactically invest in lump sum.


• You can also invest in this fund through 6 – 12 months STP from LIC MF Liquid or Ultra Short Duration Fund.

Investors should consult with their financial advisors if LIC MF Small Cap Fund is suitable for their investment needs.