One small-cap fund just earned a four-star rating from us

Summary: A major small-cap fund just earned a rating upgrade from three to four stars. We also bumped up a large & mid-cap fund’s ratings. So, let’s find out the identity of both these funds…

Every month, we reassess every mutual fund in the country and update its star rating.

Our fund ratings are designed to make life easier for investors. They offer a quick and objective way to identify funds that have delivered strong risk-adjusted performance compared to their peers.

Put very simply, our rating is a single score that combines two things:

• How much return a fund has delivered
• How much risk it took to deliver those returns

The result is a risk-adjusted return score, which is then compared with all other funds in the same category. A five-star fund is among the best in its category on this measure; a one-star fund is among the worst.

For equity and hybrid funds, we combine the fund’s three-year and five-year risk-adjusted scores (60 per cent weight for five-year, 40 per cent for three-year) to get a single number. Funds without a five-year history are rated purely on their three-year numbers. For debt funds, we use 18 months of weekly data.

It’s important to note: a star rating is a starting point, not the final word. A good portfolio will not consist only of four- and five-star funds. Your risk tolerance, investment horizon and diversification goals matter just as much. In fact, sometimes even a two-star fund could be the right choice for a part of your portfolio.

The star climbers of the month

1. HDFC Small Cap Fund (Earlier rating: ★★★ | Now rated ★★★★)

With assets of over Rs 36,000 crore, HDFC Small Cap is now the second-largest small-cap scheme in India, having quadrupled in size since 2020.

Performance snapshot:

• Three-year trailing return: 23.75 per cent (ranked fifth out of 28 funds)
• Five-year trailing return: 32.22 per cent (fourth best)

But trailing returns only show performance from a single starting point. Rolling returns, on the other hand, measure performance across multiple overlapping periods, giving a better picture of consistency. Over the last five years, HDFC Small Cap delivered 21.3 per cent aggregate five-year rolling returns, comfortably ahead of its benchmark’s 17.9 per cent.

Let’s also look at the risk and reward metrics:

• Sharpe ratio: 1.06. For the uninitiated, this ratio tells you how much reward the fund gave for every bit of risk it took, and HDFC’s small-cap fund is the fourth-best score among all small-cap funds. A Sharpe ratio of 1.06 means that for every unit of risk the fund took, it generated 1.06 units of excess return (return above the risk-free rate). Put simply, it shows the fund was rewarding investors well for the risk they were taking.
• Standard Deviation (SD): 15.3. This measures how much the fund’s returns have fluctuated. Lower SD equals a smoother ride, and since HDFC Small Cap’s SD is among the five lowest in its category, its volatility is relatively well-controlled for a small-cap fund.

2. HSBC Large & Mid Cap Fund (Earlier rating: ★★ | Now rated: ★★★)

Large & mid-cap funds invest at least 35 per cent each in large-cap and mid-cap companies, giving you a mix of stability and growth potential.

Launched in 2019, HSBC’s scheme now manages over Rs 4,300 crore. (For comparison, the largest fund in this category, Mirae Asset Large & Midcap, manages over Rs 40,000 crore.)

Performance snapshot:

• Three-year trailing return: 20.83 per cent (sixth out of 36 funds)
• Five-year trailing return: 22.38 per cent (18th in category)
• Five-year rolling returns: 22.4 per cent, the sixth-best in its peer group, beating its benchmark’s 15.8 per cent.
• Sharpe Ratio: 0.86, which is somewhere in the middle when compared to other large & mid-cap funds.
• Standard Deviation: 15.7, about average for this category, suggesting neither unusually high nor unusually low volatility.

Should you invest in these funds now?

A rating upgrade is good news, but it is not a buy or sell signal by itself. A four-star rating means the fund has done well compared to peers, but your portfolio needs may still call for a different mix of funds.

That’s where Value Research Fund Advisor comes in. It is our flagship service that gives you handpicked recommendations, asset allocation guidance and a complete roadmap for building wealth the smart way.

So, to know whether our analysts have added these funds to our Best Buy list, we suggest you check our platform today.

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Also read: Why this 5-star mid-cap fund's size has grown 7x in 10 years