Indian funds have secured seven of the top 10 places in the rankings of leading small-cap funds in Asia, thanks to smart stock selection amid growing investor demand for low-cost stocks with the potential to deliver multi-dredging returns.

An analysis of nearly 300 Asian small-cap schemes shows that DSP BlackRock Micro Cap Fund is in the lead, with a return of 82% over the past year. Managed by Vinit Sambre, who has been with DSP BlackRock for just over three years, this fund has also well beaten the 58% rise in BSE’s Small-Cap Index since August 2009. period, while the broader BSE 500 index is up 27%.

The other six schemes — Sundaram BNP Paribas Select Small Cap, HSBC Small Cap, JPMorgan Smaller Companies, Franklin India Prima, Franklin India Smaller Companies and ING Vysya CUB — have provided investors with returns of between 44% and 57% over a period of 12 months. months. † These schemes manage anywhere between ’46 crore and ‘954 crore.

Four of these funds were launched during the height of the previous bull run between January 2007 and March 2008 and investors in these funds have also experienced massive erosion of their initial investment in the downturn that followed.

Mutual fund tracking firm Value Research called the DSP fund an impressive product across the small-cap universe, noting that the stocks it held were “credible, household names and there was a distinct lack of momentum in the portfolio.” The fund’s holdings include companies with high return on equity and strong leadership niches in their industry.

Dhirendra Kumar, CEO of Value Research, said the closed nature of some of these funds helped them weather the turbulence in the market. “These funds experienced no redemption pressure during the declining phase. This, in turn, helped them invest for the longer term,” he said.

The DSP fund opened in June this year and fund manager Mr Sambre has kept nearly 10% of his `311-crore corpus in cash to accommodate potential redemptions and seize any opportunity in the market.

There are 10 small-cap funds in India, which manage approximately 3,450 crore of stocks. These represent only 2% of the total AUM under share plans.

Market experts say that as many large-cap stocks became fully-priced and relatively unattractive over the past year, the rally shifted to small-caps. Stocks such as coolermaker Symphony and luggage maker VIP Industries have led the small caps in the market. Ahmedabad-based Symphony is up 830% while VIP is up 548% in the past 12 months. By comparison, the Sensex’s two biggest winners – Tata Motors and Tata Consultancy Services – are up 135% and 61% respectively.

“Many small caps with excellent companies traded at pathetically low valuations — many trading below book value and yielding 5-7% dividends,” said Deven Choksey, chief executive officer at KR Choksey Shares & Securities. “They’re just heavily bought.”

While small-cap funds have delivered solid returns over the past year, experts say investors should exercise caution and only have 10-15% of their equity exposure in such funds or companies. This is largely due to the volatile nature of their stock performance.

“Investors must have a strong stomach and the ability to

can withstand substantial declines in such funds,” said Mr. Kumar of Value Research.

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