Unveiling the Performance Drivers: Quant Small Cap Fund vs Axis Small Cap Fund
March 9, 2024 Mutual Fund
In 2023, amid weak global macros, rising interest rates, and geopolitical uncertainties, the Indian stock market remained resilient. Small cap mutual fund schemes are in focus these days since they have outperformed and exceeded all expectations; indices like the S&P BSE Smallcap 250 index outperformed the benchmark Nifty 50 by a significant margin.
The previous year saw a strong comeback for mid and small caps, outperforming the large caps by a significant margin. The small cap surge was probably spurred by several factors; stable interest rates created an ideal environment for equity investors.
Furthermore, several mid and small cap sectors were stimulated by the Indian government’s emphasis on increasing local manufacturing through PLI initiatives (Production Linked Incentive). Domestic mutual fund inflows towards mid- and small cap funds showed a sharp increase in 2023. The surge was driven by this pursuit of potentially higher returns than large-cap stocks.
[Read: Liquidity Check: Is Your Small Cap Fund Under Pressure?]
In recent years, there has been a significant increase in liquidity in the Indian stock market, injected by both domestic and foreign investors. The increased liquidity has helped push stock prices up, especially in the mid and small-cap segments.
Investors are drawn in by the momentum created by this recent rally, hoping to profit from the sustained expansion. This growth potential attracts investors looking for substantial returns, particularly when contrasted with the frequently slower and steady growth of large-cap firms.
According to the SEBI mandate, small cap mutual funds must invest in companies ranked below 250 in market capitalisation. Additionally, these plans must allocate at least 65% of their funds to small-cap stocks. Small companies go through many ups and downs – more than the established companies in the large and mid-cap segments.
As a result, investing in small cap companies is considered quite risky; the small cap market can also be very volatile, particularly in the short term. It is therefore advised that before investing in small cap funds, investors think about their suitability.
[Read: Will Small Cap Mutual Funds Continue to Outshine in 2024?]
When navigating this exciting yet volatile landscape, choosing the right fund becomes paramount. Let us explore the most prominent players in this small cap arena – the Quant Small Cap Fund vs Axis Small Cap Fund. This article offers a comprehensive comparison of these two funds, aiding investors in making informed decisions.
Quant Small Cap Fund is an open-ended equity scheme that belongs to Quant Mutual Fund. It is a well-established small cap mutual fund scheme launched in October 1996 and currently has an AUM of Rs 17,193.09 crores (as of Feb 29, 2024).
The scheme targets long-term growth by investing in smaller companies with promising futures. While it comes with the inherent volatility of small cap stocks, the Quant Small Cap Fund offers a compelling option for investors seeking higher returns and a chance to capitalise on the potential of India’s growing smaller businesses.
Quant Small Cap Fund is benchmarked against Nifty 50 – TRI as a primary index and Nifty Smallcap 250 – TRI as a secondary index.
Axis Small Cap Fund is an open-ended equity scheme and belongs to Axis Mutual Fund. It is a well-established small cap mutual fund scheme launched in November 2013 and currently has an AUM of Rs 19,530.69 crores (as of Feb 29, 2024).
The scheme presents an interesting proposition for investors seeking exposure to the high-growth potential of the small-cap space. The strategy for stock selection aims to identify companies with strong fundamentals and growth characteristics beyond the typical sectors. This could potentially lead to a more diversified portfolio within the small-cap universe.
Axis Small Cap Fund is benchmarked against Nifty 50 – TRI as a primary index and Nifty Smallcap 250- TRI as a secondary index.
Investment Style and Philosophy:
– Quant Small Cap Fund is known for its momentum-driven investment strategies. Quant Small Cap Fund follows an aggressive investment approach whereby it constantly hunts for attractive opportunities. The scheme is quick in its approach to shifting allocation between market caps and sectors depending on the market conditions, which assists in generating significant alpha for investors in the fund.
– Axis Small Cap Fund has been able to establish itself in the small-cap space. Notably, it has shown a massive growth in AUM from just about Rs 220 crore registered in January 2019 to Rs 19,530.69 crore at present. It utilises a holistic risk management strategy to manage risks associated with investing in equity markets.
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Performance Comparison: Rolling Returns
Scheme Name Absolute (%) CAGR (%) 1 year 3 Years 5 Years 7 Years 10 Years Quant Small Cap Fund (G)-Direct Plan 66.61 44.73 37.59 26.47 21.24 Axis Small Cap Fund(G)-Direct Plan 38.79 27.83 28.06 22.62 25.09 Small Cap – Category Average 45.18 27.42 25.29 18.77 22.25 Benchmark – Nifty Smallcap 250 TRI 60.94 28.25 23.93 16.70 20.38 Data as of March 07, 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)Looking at historical data, both funds have delivered impressive returns over various timeframes. While Quant Small Cap Fund edges out in terms of 1 and 3-year returns, Axis Small Cap Fund holds the lead in the long-term (10 years).
The Axis Small Cap Fund delivers more consistent returns across all timeframes, although they are generally lower than the Quant Small Cap Fund, particularly in shorter periods. Axis Small Cap Fund boasts a history of exceeding category averages and its benchmark index, the NIFTY Smallcap 250 Total Return Index, over various timeframes.
Though Quant Small Cap Fund's performance until 2019 was below par, the fund has registered extraordinary performance in recent years and handsomely rewarded its investors. Over the past 5 years, the Quant Small Cap Fund has delivered a return of 37.59%, exceeding both the category average (25.29%) and the benchmark (23.93%).
While both the scheme's historical performance is encouraging, 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?]
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Portfolio Composition: Asset Allocation of Schemes
Both Quant Small Cap Fund and Axis 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 % Quant Small Cap Fund 65.49 25.69 0.24 Axis Small Cap Fund 67.49 2.31 20.13 Data as of January 31, 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)Both funds are primarily invested in small-cap companies. Axis Small Cap Fund allocates a slightly higher portion to small-caps compared to Quant Small Cap Fund.
Do note that Quant Small Cap Fund has a higher allocation to large caps, whereas Axis Small Cap Fund does not allocate much to large caps. Coming to mid-cap stocks, Axis Small Cap Fund aims to seize the benefit of potential growth from the mid cap segment.
Quant Small Cap Fund's large-cap allocation, indicates a more balanced approach, aiming for growth potential with some level of stability. Axis Small Cap Fund's lower large-cap allocation suggests a slightly higher risk profile compared to Quant.
While both primarily focus on small-caps, the varying allocations to large-caps suggest that Axis Small Cap Fund offers a potentially more aggressive growth strategy, while Quant Small Cap Fund might prioritize a more balanced approach.
[Read: 5 Best Small Cap Funds for 2024]
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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) Quant Small Cap Fund Axis Small Cap Fund Standard Deviation 21.45 13.68 Sharpe Ratio 0.51 0.51 Sortino Ratio 1.02 1.02 Data as of March 07, 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)The Quant Small Cap Fund has a significantly higher Standard Deviation (21.45%) compared to the Axis Small Cap Fund (13.68%). This suggests the Quant Small Cap Fund experiences larger swings in returns, both positive and negative.
Interestingly, both funds have the same Sharpe Ratio (0.51). This suggests that despite the higher volatility of the Quant Small Cap Fund, its potential excess returns are seemingly well-compensated for the additional risk taken.
Once again, both funds have the same Sortino Ratio (1.02). This reinforces the previous observation that the Quant Small Cap Fund's higher volatility is primarily on the downside, potentially offering higher potential returns for investors willing to stomach that 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.
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Top Holdings of the Small Cap Schemes:
Quant Small Cap Fund Axis Small Cap Fund Company % Assets Company % Assets Reliance Industries Ltd. 9.87 Birlasoft Ltd. 4.51 IRB Infrastructure Developers Ltd. 3.86 Narayana Hrudayalaya Ltd. 4.03 JIO Financial Services Ltd. 3.41 Brigade Enterprises Ltd. 3.92 Adani Power Ltd. 3.33 Cholamandalam Financial Holdings Ltd. 3.23 Hindustan Copper Ltd. 3.27 Blue Star Ltd. 2.97 Arvind Ltd. 2.69 Krishna Institute of Medical Sciences Ltd 2.66 HFCL Ltd. 2.49 CCL Products (India) Ltd. 2.49 Bikaji Foods International Ltd. 2.36 JB Chemicals & Pharmaceuticals Ltd. 2.26 RBL Bank Ltd. 2.26 JK Lakshmi Cement Ltd. 2.10 Shipping Corporation Of India Ltd. 2.19 Can Fin Homes Ltd. 2.08 Data as of January 31, 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)While both funds focus on small cap companies, a closer look at their top holdings reveals some key differences in their investment strategies and potential sector biases.
Quant Small Cap Fund's top holdings represent a diverse range of sectors, including infrastructure (IRB Infrastructure), financials (JIO Financial Services, HFCL), power (Adani Power), and consumer goods (Bikaji Foods). This could suggest a potential tilt towards cyclical sectors that are sensitive to economic fluctuations.
Axis Small Cap Fund's top holdings suggest a potential tilt towards the healthcare sector (Narayana Hrudayalaya, Krishna Institute of Medical Sciences) and financials (Cholamandalam Financial Holdings, JB Chemicals & Pharmaceuticals). This could indicate a possible bias towards growth-oriented sectors.
The Quant Small Cap Fund's reliance on a single large-cap holding (Reliance Industries) could introduce some stability but might also reduce its pure small-cap growth potential. The Axis Small Cap Fund's sectoral focus might offer concentrated exposure to specific sectors, potentially leading to higher returns or losses depending on the sector's performance.
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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 Quant Small Cap Fund vs Axis Small Cap Fund:
Scheme Name Direct Plan Expense Ratio Regular Plan Expense Ratio Quant Small Cap Fund 0.70% 1.67% Axis Small Cap Fund 0.53% 1.63% Data as of January 31, 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)Quant Small Cap Fund offers a higher expense ratio in both the plans, indicating lower net returns for investors compared to Axis Small Cap Fund which offers a cost advantage to investors. Both Quant Small Cap Fund and Axis Small Cap Fund offer direct plans with competitive expense ratios. While the Quant Small Cap Fund has a slightly higher expense ratio, the difference is minimal.
Remember, a lower expense ratio translates to potentially higher returns over time.
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Suitability of Investors to the Schemes:
Quant Small Cap Fund is ideal for investors seeking a balance between growth and risk. Its large cap allocation and fundamentally driven bottom-up approach emphasize long-term potential, making it appropriate for investors with a moderate to high-risk appetite.
[Read: Reasons That Should Not Be the Basis for Investing in Small-Cap Funds]
Axis 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 Axis Small Cap Fund suitable for investors having very high risk appetite and a long-term investment horizon of at least 7-10 years.
Both schemes are suitable for investors willing to accept higher potential volatility in exchange for higher potential returns. 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.
To summarise…
The battleground of small-cap mutual funds offers investors a compelling mix of risk and reward. Both Quant Small Cap Fund and Axis Small Cap Fund present strong contenders, each wielding a unique investment philosophy, catering to different investor profiles. The choice ultimately boils down to your individual risk tolerance and investment goals.
The Indian small-cap landscape presents an exciting avenue for wealth creation, and with careful consideration, you can select the champion that propels your investment journey forward. Consulting a SEBI-registered financial advisor can be invaluable to ensure optimal alignment with your specific investment objectives.
*The securities quoted are for illustration only and are not recommendatory.
This article first appeared on PersonalFN here
