Which small-cap funds have most cash on their hands?

Indian equity markets may have eased from all-time highs, but mutual fund investors have continued to pour into mutual fund schemes. Small-cap and mid-cap funds have continued to see good investor interest among the many equity categories.

Data shows that since the start of the financial year mid-cap funds have witnessed Rs 14,756 crore net inflows, while small-cap funds have seen net investments of Rs 15,586 crore during this financial year till September-end.

To be sure, sectoral/thematic funds have witnessed the highest inflows during this financial at Rs 96,489 crore. However, much of those investments have come by the way of fund mobilisation via new fund offers (NFOs).

In small-cap and mid-cap segments, investors seem to be rewarding outperformance over large-cap names.

Data available with mutual fund research platform ACE MF shows that Nifty Midcap 150 Total Return Index (TRI) has gained 4.67 percent on a three-month basis, while Nifty Smallcap 250 TRI is up 6.51 percent. On the other hand, Nifty 50 TRI is up just 1.56 percent during this period.

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Despite broad market corrections over the past one month, small-cap and mid-cap indices have managed to restrict fall compared to large-cap indices.

“In recent years, the market capitalisation of small-cap companies has grown significantly, highlighting their increasing role in the economy. Small caps can be fertile ground for multi-baggers, offering investors the chance to achieve outsized gains as these companies scale,” Aakash Manghani, Fund Manager-Equities at TRUST MF recently said during the NFO launch of TRUST MF Small Cap Fund.

However, the gush of inflows may have forced many small-cap funds to look at ways to reduce risk in their portfolio. A way of reducing risk in a small-cap scheme is cash holding.

Funds with a high cash allocation may suggest a sense of caution towards the stock market. Generally, when funds hold a significant cash position, it implies that the market is overvalued, or it is an anticipation of favourable investment opportunities in the future.

Over the past few months, the aggregate cash levels at small-cap funds have remained at higher levels.

As per the latest batch of mutual fund stress-test results, small-cap funds had an average 5.6 percent cash levels of their overall portfolios.

Quantum Small Cap Fund which is among the smallest and the newest in the category had 16.8 percent cash allocation in its scheme. It was followed by ICICI Prudential Smallcap Fund (assets under management of Rs 8,819 crore), which had 14.3 percent cash on its books. Further, Quant Small Cap Fund, which is among the largest in its category at Rs 26,685 crore AUM had 13.1 percent, cash allocation.

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The largest small-cap fund, Nippon India Small Cap Fund (Rs 62,275 crore), had 4.1 percent cash allocation. SBI Small Cap Fund (Rs 34,229 crore) and HDFC Small Cap Fund (Rs 33,935 crore), which are the next in line of the AUM list had 7.3 percent and 6.7 percent cash allocation, respectively.

Edelweiss Small Cap Fund which has assets of Rs 4,195 crore had least cash component in its book at 0.9 percent. It was followed by Invesco India Smallcap Fund (Rs 5,371 crore) at 1.2 percent and LIC MF Small Cap Fund (Rs 371 crore) at 1.4 percent.

A way to reduce risk in a small-cap fund is to have an allocation to large-cap stocks. This is because large-cap stocks can help manage liquidity risk when the equity markets are overvalued. Small-cap mutual funds must invest at least 65 percent of their corpus in small-cap stocks but can invest the remaining portion in large-cap or mid-cap stocks.

Quant Small Cap Fund had the highest large-cap allocation at 20.6 percent, followed by Nippon India Small Cap Fund (12.4 percent), Quantum Small Cap Fund (10.9 percent) and Canara Robeco Small Cap Fund (10.4 percent).

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On the other hand, DSP Small Cap Fund, Tata Small Cap Fund, UTI Small Cap Fund and JM Small Cap Fund had zero allocation to large-cap stocks.