Smaller Companies, Bigger Returns: Franklin India Smaller Companies Fund

The Franklin India Smaller Companies Fund is a small-cap fund that has been in existence for over a decade. It has delivered average annual returns of 22.94% since its inception and has an AUM of ₹14,460 Crores. The fund has an expense ratio of 0.89%, which is higher than that of most other small-cap funds. It has a very high-risk rating and is suitable for investors who are looking for very high returns and are ready to accept the possibility of higher losses. The fund has delivered above-average returns with exceptional consistency and can be a good addition to an investor's portfolio.

Should you invest in Franklin India Smaller Companies Fund for the long term?

Franklin India Smaller Companies Fund is a mutual fund that has been in operation for 18 years and 2 months. The fund has delivered 15.93% returns since its inception. As of 22nd October 2024, the latest Net Asset Value (NAV) is ₹197.4101, with a total Assets Under Management (AUM) of ₹14,460.02 Crores. The fund has a very high-risk rating and is suitable for investors who are looking for very high returns over a long investment horizon of at least 3-4 years.

Investment Strategy

The fund seeks to provide long-term capital appreciation by predominantly investing in small-cap companies. By mandate, the fund must invest at least 65% of its assets in small-cap stocks at all times. As of 29th February 2024, the fund had invested 92.63% in equity, 7.12% in cash and cash equivalents, and 0.25% in debt. The fund has a small cap category, which includes all stocks except the largest 250 stocks by market capitalization.

Returns and Taxation

The fund has provided returns of 25.89% in the last 3 months, 35.85% in the last year, 99.65% in the last 3 years, and 1047.65% since its launch. The minimum investment amount is ₹500.

For taxation, if the mutual fund units are sold after 1 year from the date of investment, gains up to ₹1 lakh in a financial year are exempt from tax. Gains over ₹1 lakh are taxed at a rate of 10%. If the units are sold within 1 year, the entire amount of gain is taxed at a rate of 15%. Dividends are taxed according to the investor's tax slab. If an investor's dividend income exceeds ₹5,000 in a financial year, a Tax Deducted at Source (TDS) of 10% is deducted before distribution.

Recommendations

The fund is suitable for investors with a long investment horizon of at least 3-4 years who are seeking very high returns and are comfortable with the possibility of higher losses. It is important to note that small-cap funds tend to fall more when stock prices decline, so investors should be prepared for severe ups and downs.

In summary, the Franklin India Smaller Companies Fund can be a good investment option for those with a long-term investment horizon and a high-risk appetite, but it is essential to carefully consider your investment goals, risk tolerance, and financial situation before making any investment decisions.

What are the risks of investing in this fund?

Investing in the Franklin India Smaller Companies Fund carries a very high level of risk. This is due to the fund's focus on small-cap companies, which tend to experience more significant fluctuations in stock prices compared to larger companies. As a result, investors in this fund should be prepared for the possibility of higher losses.

The fund's volatility is reflected in its performance, with a standard deviation that indicates more unpredictable returns compared to other funds in its category. Additionally, the fund's beta value suggests that it is more volatile than the market average, delivering less predictable returns. The fund's Sharpe ratio, which evaluates risk-adjusted performance, is also lower than that of its peers, indicating that it takes on more risk for the returns generated.

Another risk to consider is the fund's expense ratio, which is higher than the category average. This means that a larger portion of the returns will be used to cover expenses, resulting in lower returns for investors.

Furthermore, investors should be aware of the potential tax implications. Short-term capital gains are taxed at 20% if the investment is redeemed before one year, while long-term capital gains are taxed at 12.5% on returns exceeding ₹1.25 lakh in a financial year. Additionally, dividends are taxed according to the investor's tax slab, and a TDS of 10% is deducted if the dividend income exceeds ₹5,000 in a financial year.

Finally, the fund has an exit load of 1% if redeemed within one year of investment, which may impact the overall returns.

How does this fund compare to other small-cap funds?

The Franklin India Smaller Companies Fund is a small-cap fund that has been in operation for 18 years and 2 months. It has delivered 15.93% returns since its inception. The fund has a Value Research rating of Very High Risk. The fund has delivered a return of 25.89% in the last 3 months, 35.85% in the last year, and 99.65% in the last 3 years. The fund's latest NAV is ₹197.410 as of 23 October 2024.

The fund has an annual expense ratio of 0.89% or 1.77%, depending on the source. The expense ratio of the fund is lower than the category average of 0.62% or 1.83%. The fund has no lock-in period and investors can expect higher returns in the long term, but with more severe ups and downs along the way.

Compared to other small-cap funds, the Franklin India Smaller Companies Fund has delivered mixed returns. Some alternative small-cap funds include:

• Nippon India Small Cap Fund Direct- Growth
• Bandhan Small Cap Fund Direct-Growth
• Tata Small Cap Fund Direct - Growth
• Invesco India Smallcap Fund - Growth
• ITI Small Cap Fund - Regular Plan - Growth
• Mahindra Manulife Small Cap Fund - Regular Plan - Growth
• Quant Small Cap Fund - Growth
• LIC MF Small Cap Fund - Growth
• HSBC Small Cap Fund - Growth

These alternative small-cap funds may offer similar or better returns with a lower expense ratio, depending on the investor's preferences and risk tolerance. It is important to consider the investor's financial goals, time horizon, and risk tolerance before investing in any mutual fund, including small-cap funds.

What are the tax implications of investing in this fund?

The Franklin India Smaller Companies Fund is a mutual fund that invests predominantly in small-cap stocks. The fund has no lock-in period, but investors are warned against investing in it if they need to redeem their investment in under seven years.

Tax Implications

If you invest in the Franklin India Smaller Companies Fund, there are several tax implications to be aware of:

• Short-term capital gains tax: If you sell your mutual fund units within one year of the investment date, the entire amount of gain is taxed at a rate of 15% (Short-term Capital Gain Tax).
• Long-term capital gains tax: If you sell your mutual fund units after one year from the date of investment, gains of up to Rs 1 lakh in a financial year are exempt from tax. Gains over Rs 1 lakh are taxed at a rate of 10% (Long-term Capital Gain Tax).
• Dividend Distribution Tax: Dividends are added to the income of the investors and taxed according to their respective tax slabs. If an investor's dividend income exceeds Rs. 5,000 in a financial year, the fund house also deducts a TDS (Tax Deducted at Source) of 10% before distributing the dividend.

How do I invest in this fund?

Investing in the Franklin India Smaller Companies Fund can be done directly through the website of the fund house, Franklin Templeton Mutual Fund. The fund can also be purchased through platforms like MF Central and MF Utility. If you are uncomfortable buying mutual funds online, you can seek help from a mutual fund distributor, such as a bank.

When investing in this fund, it is important to note that it has no lock-in period, but there is an exit load of 1% if redeemed within 1 year. The fund has a minimum SIP amount of ₹500.

The fund has an expense ratio of 0.89%, which is considered higher than what most other Small Cap funds charge. The expense ratio is an annual fee deducted from the Net Asset Value (NAV) on a daily basis. The NAV is the unit price for the fund, which is declared once each day, generally at the end of the day.

As of October 22, 2024, the NAV of the fund was ₹197.41.

Frequently asked questions