A Tailored Comparison between ICICI Pru Small Cap Fund vs Tata Small Cap Fund

June 3, 2024 Mutual Fund

Mid and Small cap stocks made a robust recovery last year, outperforming the large caps by a significant margin. A number of reasons likely contributed to the small cap boom, one of them was the favourable environment that steady interest rates provided for equity investors.

For investors who are willing to take significant risks, the Indian small-cap market presents attractive growth prospects. These small cap stocks are more vulnerable to fluctuations in the market, though. To navigate this dynamic landscape, investors often turn to actively managed small cap funds.

An interesting factor to consider is the implementation of stress tests. Since the small-cap segment has had a record-breaking surge over the past year, market regulator SEBI has taken note of the circumstances. Every fifteen days, mutual fund companies are required by the AMFI to run stress tests on their small- and mid-cap funds.

[Read: Will Small Cap Mutual Funds Continue to Outshine in 2024?]

Additionally, it suggested that mutual funds rebalance the portfolio and reduce inflows into these schemes. A stress test’s primary goal is to evaluate the portfolio’s liquidity. Considering this, it is risky to invest in small-cap companies, and the small-cap market can be extremely volatile, especially in the short run.

These rigorous evaluations, conducted every 15 days, assess the funds’ ability to withstand market downturns. It is therefore advised that before investing in small cap funds, investors think about their suitability.

Choosing the right fund becomes paramount when navigating this exciting yet volatile landscape. Let us explore the most prominent players in this small cap arena – the ICICI Pru Small Cap Fund vs Tata Small Cap Fund. This article offers a comprehensive comparison of these two funds, aiding investors in making informed decisions.

# – ICICI Pru Small Cap Fund

ICICI Pru Small Cap Fund is an open-ended equity scheme that belongs to ICICI Pru Mutual Fund. It is a well-established small cap mutual fund scheme launched on October 2007 and currently has an AUM of Rs 7,658.95 crores (as of April 30, 2024).

The scheme seeks to generate capital appreciation by predominantly investing in equity and equity related securities of small cap stocks. The fund invests in companies with the potential for significant future earnings growth. ICICI Pru Small Cap Fund is benchmarked against Nifty Smallcap 250 – TRI as a primary index.

# – Tata Small Cap Fund

Tata Small Cap Fund is an open-ended equity scheme and belongs to Tata Mutual Fund. It is a well-established small cap mutual fund scheme launched on November 2018 and currently has an AUM of Rs 6,951.59 crores (as of April 30, 2024).

Tata Small Cap Fund seeks to generate long-term capital appreciation by predominantly investing in equity and equity-related instruments of small-cap companies. Tata Small Cap Fund, a prominent contender, consistently attracts investor interest. Tata Small Cap Fund is benchmarked against Nifty Smallcap 250- TRI as a primary index.

Investment Style and Philosophy:

– ICICI Pru Small Cap Fund focuses on companies with strong growth potential, but at valuations that offer some margin of safety. It seeks to identify companies on an upswing but avoids overly expensive stocks. The fund operates with a concentrated portfolio, typically holding around 40-50 stocks. This allows for in-depth research into each company but also increases the risk if a few holdings underperform.

– Tata Small Cap Fund adopts a quality-growth approach to navigate the dynamic small-cap universe. The fund managers prioritize companies with strong fundamentals, a clear competitive edge, and the potential for sustained earnings growth. This strategy aims to achieve healthy long-term growth while mitigating some of the inherent volatility associated with small-cap stocks.

Performance Comparison: Rolling Returns

Scheme Name	Absolute (%)		CAGR (%)
Scheme Name	1 year	3 Years	5 Years	7 Years	10 Years
ICICI Pru Small Cap Fund (G)-Direct Plan	34.48	32.52	14.60	15.43	18.93
Tata Small Cap Fund(G)-Direct Plan	36.93	35.01	28.62	–	–
Small Cap – Category Average	46.80	25.57	26.30	18.53	20.51
Benchmark – Nifty Smallcap 250 TRI	44.31	28.25	10.46	13.64	12.01

Data as of May 30, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)

Historical data shows while both ICICI Pru Small Cap Fund and Tata Small Cap Fund have outperformed the Nifty Smallcap 250 TRI (benchmark) across most measured periods, their performance against the category average and each other varies.

The ICICI Pru Small Cap Fund delivers more consistent returns across all timeframes, although they are generally lower than the Tata Small Cap Fund, particularly in shorter periods. Overall, Tata Small Cap Fund demonstrates promising performance, particularly in the 3 and 5-year timeframe.

ICICI Pru Small Cap Fund has consistently outperformed the Nifty Smallcap 250 TRI benchmark across all timeframes except the one year period. This indicates the fund's active management strategy has added value compared to the broader market performance of small-cap stocks.

While both funds have delivered impressive returns over the long term, it's crucial to remember that past performance doesn't guarantee future results. Small-cap stocks are inherently more volatile, meaning their prices can fluctuate significantly. This volatility can lead to both higher potential returns and greater potential losses.

[Read: Can Small Cap Funds Deliver Big Returns Going Forward?]

Portfolio Composition: Asset Allocation of Schemes

Both ICICI Pru Small Cap Fund and Tata Small Cap Fund are popular amongst investors in the small cap segment, but their asset allocation strategies differ slightly.

Scheme Name	Small Cap %	Large Cap %	Mid Cap %	Others
ICICI Pru Small Cap Fund	66.73	6.45	16.16	10.64
Tata Small Cap Fund	92.98	–	1.83	5.18

Both funds are primarily invested in small-cap companies. Tata Small Cap Fund allocates a higher portion to small-caps compared to ICICI Pru Small Cap Fund.

ICICI Pru Small Cap Fund prioritizes diversification with a mix of small, mid, and large-cap stocks, potentially offering a smoother ride with moderate risk and return. A small allocation to large-caps likely aims to reduce overall volatility and offer some balance. Inclusion of mid-caps adds stability and provides exposure to companies on the cusp of becoming large-caps.

Tata Small Cap Fund focuses heavily on small-cap stocks, aiming for higher potential returns but with greater volatility and risk. This fund completely avoids large-cap investments and has a minimal allocation to mid-cap stocks. No allocation to large-caps suggests a purely high-risk, high-reward strategy.

While both primarily focus on small-caps, the varying allocations to large-caps suggest that Tata Small Cap Fund offers a potentially more aggressive growth strategy. At the same time, ICICI Pru Small Cap Fund might prioritise a more balanced approach.

[Read: 5 Best Small Cap Funds for 2024]

Market Volatility: Risk Profile of Schemes

The equity market experiences constant ups and downs, and small-cap funds are particularly susceptible to these fluctuations. Consequently, small-cap funds carry a higher risk profile compared to large-cap funds.

Risk Ratio (3 years)	ICICI Pru Small Cap Fund	Tata Small Cap Fund
Standard Deviation	15.33	15.28
Sharpe Ratio	0.41	0.44
Sortino Ratio	0.90	0.91

Given the data, both ICICI Pru Small Cap Fund and Tata Small Cap Fund have very similar risk profiles, as indicated by their standard deviations which are 15.33 and 15.28 respectively. However, Tata Small Cap Fund appears to offer a slightly better risk-adjusted return based on the Sharpe Ratio and Sortino Ratio.

Interestingly, the Sharpe Ratio of Tata Small Cap Fund (0.44) is marginally higher than that of ICICI Pru Small Cap Fund (0.41). A higher Sharpe Ratio indicates better risk-adjusted returns, meaning the fund is generating a higher return per unit of risk taken.

The Sortino Ratio focuses on downside risk, penalizing negative returns more than positive returns of the same magnitude. Both funds have very similar Sortino Ratios (0.90 and 0.91), suggesting that they are equally good at managing downside risk.

[Read: Want to Invest in Small Cap Funds? Manage the Risk and Reward Well]

Remember, risk ratios provide valuable insights, but they should be considered alongside other factors like the fund's investment philosophy, past performance, and expense ratio before making an investment decision.

One must also consider their risk tolerance and investment goals to determine which fund aligns better with their investment strategy.

Top Holdings of the Small Cap Schemes:

ICICI Pru Small Cap Fund		Tata Small Cap Fund
Company	% Assets	Company	% Assets
Nippon Life India Asset Management Ltd.	3.20	Quess Corp Ltd.	4.31
Grindwell Norton Ltd.	2.55	BASF India Ltd.	4.10
Cyient Ltd.	2.54	IDFC Ltd.	3.64
Kalpataru Projects International Ltd.	2.17	Elantas Beck India Ltd.	3.54
Schaeffler India Ltd.	2.13	Kirloskar Pneumatic Company Ltd.	3.39
Larsen & Toubro Ltd.	2.13	Gujarat Pipavav Port Ltd.	3.30
Rolex Rings Ltd	2.12	Radico Khaitan Ltd.	3.16
Brigade Enterprises Ltd.	2.12	Netweb Technologies India Ltd.	2.89
Cummins India Ltd.	2.04	Redington Ltd.	2.83
Procter & Gamble Health Ltd.	1.98	Time Technoplast Ltd.	2.82

Both ICICI Pru Small Cap Fund and Tata Small Cap Fund appear to be diversified across various companies and sectors, with no single company exceeding 4.31% of their assets. This indicates neither fund is taking excessive risks on any one particular company.

Looking at the top holdings, ICICI Pru Small Cap Fund seems to have a tilt towards Industrials with companies like Grindwell Norton, Cyient, and Larsen & Toubro featuring prominently. They also have exposure to Financial Services (Nippon Life India Asset Management) and Consumer Durables (Schaeffler India).

Tata Small Cap Fund, on the other hand, has a more spread-out allocation across sectors. While they do hold some Industrial companies (Elantas Beck), their top holdings also include firms from Services (Quess Corp), Financials (IDFC), and Consumer Discretionary (Radico Khaitan).

It's important to remember that this data provides a snapshot of holdings at a specific point in time. The fund managers may adjust these holdings based on market conditions.

Expense Ratio of the Schemes

When comparing small cap funds, the Expense Ratio, which represents the annual fee charged, plays a crucial role in determining your returns. Here's a quick breakdown of ICICI Pru Small Cap Fund vs Tata Small Cap Fund:

Scheme Name	Direct Plan Expense Ratio	Regular Plan Expense Ratio
ICICI Pru Small Cap Fund	0.57%	1.77%
Tata Small Cap Fund	0.35%	1.74%

Data as of April 30, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)

ICICI Pru Small Cap Fund offers a higher Expense Ratio in both the plans, indicating lower net returns for investors compared to Tata Small Cap Fund, which offers a cost advantage to investors. Tata Small Cap Fund offer a lower expense ratio in direct plan, while there is a minimal difference in expense ratio for the regular plan.

Remember, a lower expense ratio translates to potentially higher returns over time.

Suitability of Investors to the Schemes:

ICICI Pru Small Cap Fund might be suitable for investors with a higher risk tolerance and a longer investment horizon (ideally 7+ years) who are comfortable with potential volatility in exchange for the possibility of amplified returns.

[Read: Reasons That Should Not Be the Basis for Investing in Small-Cap Funds]

Tata Small Cap Fund has proven its ability to generate superior returns even in conditions where most of its peers found it challenging to limit the downside. The aggressive investment mandate along with higher allocation to mid and small-caps make Tata Small Cap Fund suitable for investors with a having very high risk appetite and a long-term investment horizon of at least 7-10 years.

Both ICICI Pru Small Cap Fund and Tata Small Cap Fund are inherently suitable for investors with a high-risk appetite due to their investment focus on small-cap companies. And the ones with a long-term investment horizon of at least 5-10 years or more. This allows you to ride out market volatility and potentially benefit from the compounded growth of small companies.

In conclusion…

Both ICICI Pru Small Cap Fund and Tata Small Cap Fund have exhibited strong performance compared to the benchmark. While Tata Small Cap Fund edges out in terms of 5 year returns, ICICI Pru Small Cap Fund offers a competitive 3 year CAGR. Choosing between them depends on your investment horizon and risk tolerance.

If you prioritize short-term gains, Tata Small Cap Fund might be a better fit, however, for a longer investment horizon and potentially higher risk-adjusted returns, ICICI Pru Small Cap Fund could be a good option. Conduct further research on the fund’s portfolio, investment philosophy, and risk profile to make an informed decision.

Consulting a SEBI-registered financial advisor can be invaluable to ensure optimal alignment with your specific investment objectives.

Note: In my previous mutual fund comparison articles I have also covered a comparative analysis between the Top 4 Small Cap Funds for 2024, you may consider reading –

Decoding India’s Small Caps: HDFC Small Cap Fund vs Nippon India Small Cap Fund

Unveiling the Performance Drivers: Quant Small Cap Fund vs Axis Small Cap Fund

This article first appeared on PersonalFN here