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Mid and small cap stocks are stocks of companies having a high growth potential over longer time frame. To put it simply, they have the potential of being large caps of future. But having said that mid cap stocks are high risk-high return investment proposition as they aim to generate wealth by generating a superior alpha (as compared to large caps) returns, but exposing their investors to greater risk. Moreover, during turbulent times they have a tendency to fall more as compared to stocks in the large cap segment. Hence the funds focusing on the mid and small cap segment are ideal for investors willing to take high risk for relatively higher gains.
Franklin India Smaller Companies Fund (FISCF) is one such open-ended fund from the stable of Franklin Templeton Mutual Fund, which follows a blend style of investing. Being launched in January 2006 the fund has completed over 5 years now.
Primary objective of the fund is "to provide long-term capital appreciation by investing in mid and small cap companies. "Moreover, it follows a mandate of investing 75% - 100% of its assets in smaller companies, while its exposure to other companies may vary in the range of 0%-25%. Also having a defensive consideration, the scheme may invest upto 25% of its assets in debt and money market instruments to manage its liquidity requirements.
Equity Portfolio
| Holdings | April 2011 | May 2011 | June 2011 | July 2011 | August 2011 |
| Pidilite Industries Ltd. | 6.3 | 6.3 | 7.1 | 6.9 | 7.2 |
| Ipca Laboratories Ltd. | 4.1 | 4.7 | 5.0 | 5.0 | 5.3 |
| Gujarat State Petronet Ltd. | 4.1 | 4.3 | 4.1 | 4.9 | 5.3 |
| Amara Raja Batteries Ltd. | 2.9 | 3.4 | 3.7 | 4.1 | 4.8 |
| IndusInd Bank Ltd. | 4.1 | 3.4 | 3.7 | 3.8 | 4.3 |
| Bharti Airtel Ltd. | 3.2 | 2.6 | 2.9 | 4.1 | 4.2 |
| Gujarat Mineral Devp. Corpn. Ltd. | 2.8 | 3.0 | 3.3 | 3.6 | 4.1 |
| Exide Industries Ltd. | 2.7 | 3.0 | 3.1 | 3.1 | 3.3 |
| Yes Bank Ltd. | 2.1 | 1.4 | 2.9 | 3.0 | 3.0 |
| FDC Ltd. | 2.8 | 2.8 | 2.7 | 2.8 | 2.9 |
Being benchmarked against the CNX Midcap Index; FISCF's portfolio constitutes of 'A' and 'B' group stocks, but 'B' group ones hold a dominance constituting 78% of the portfolio. It is comprised of total 49 stocks as per the latest portfolio. Top-10 stocks and top-5 sectors constitute 44.32% and 43.64% respectively. While undertaking its stock picking activity, FISCF follows a bottom up approach, and assigns more weightage to company specific factors rather than sectorial trait and performance. Moreover, the fund manager refrains from churning the portfolio too often (as revealed by its petite portfolio turnover ratio of 0.53 times), and adopts a "buy and hold" strategy.
How FISCF has fared vis-à-vis its peers
| Scheme Name | 6-Mth (%) | 1-Yr (%) | 3-Yr (%) | 5-Yr (%) | Std. Dev. (%) | Sharpe Ratio |
| DSPBR Small & Mid Cap (G) | 5.4 | -12.7 | 21.3 | - | 9.90 | 0.15 |
| Sundaram Select Midcap (G) | 5.7 | -11.3 | 18.6 | 12.6 | 11.25 | 0.12 |
| SBI Magnum Global'94 (G) | 11.6 | -7.2 | 15.6 | 10.2 | 10.99 | 0.11 |
| Birla SL Midcap (G) | 3.1 | -16.2 | 15.2 | 12.6 | 10.61 | 0.11 |
| Franklin India Smaller Cos (G) | -0.3 | -15.4 | 13.5 | 5.0 | 10.35 | 0.09 |
| JPMorgan India Smaller Cos (G) | 2.9 | -13.2 | 8.0 | - | 10.47 | 0.06 |
| CNX Midcap | -2.6 | -19.6 | 11.4 | 10.2 | 10.29 | 0.07 |
(Standard Deviation and Sharpe ratio is calculated over a 3-Yr period. Risk-free rate is assumed to be 6.37%)
The table above reveals that the performance of FISCF has not been very luring. Over a 3-Yr and and 5-Yr time frame, the fund has clocked a return of 13.5%and 5.0% respectively, thereby outperforming its benchmark over a 3-Yr time frame, but failed to match the performance of its benchmark over 5-Yr time frame.
Also, when assessed on the volatility front, FISCF has exposed its investors to rather high risk (as revealed by its Standard Deviation of 10.35%) and the risk adjusted returns (as reveled by the Sharp Ratio of 0.09) are quite ordinary, thus making it a high risk-moderate return investment proposition in the category.
Fund Manager Profile
| Name of the Fund Manager | Mr. K. N. Sivasubramanian | Mr. R. Janakiraman |
| Total Work Experience | Over 16 years | Over 13 years |
| Managing the fund since | Apr-07 | Feb-08 |
| Qualifications | B.E (REC, Jaipur), PGDM (IIM-C) | B.E (GCT, Coimbatore), PGDM (IIM-B) |
Although the returns generated by Franklin India Smaller Companies Fund are not very stellar, existing investors can continue to hold their investments in the said fund. This is because the portfolio held by the fund is well diversified and robust, where after a bottom-up approach adopted by the fund manager, not much churning is carried out. On the returns front, yes it exposes its investors to higher risk, but the risk-adjusted returns are quite moderate.
We believe that investors would be better-off by investing in funds which have exposed investors to lower risk and have a proven track record across market cycles. You should always take an expert opinion before investing, as holding merely funds for the longer duration wouldn't ensure better returns but better fund management coupled with patience surely does.
Happy Investing!!
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You can write back to us at PrajnaCapital [at] Gmail [dot] Com
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