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L&T Emerging Businesses Fund: should you hold or sell?


Many investors are nervous about the short-term performance of L&T Emerging Businesses Fund.
ETMutualFunds.com receives several messages on its official
Facebook page regularly from readers concerned about the performance of this prominent small cap scheme. In fact, investors have become nervous about the performance of the scheme ever since Somendra Nath Lahiri left the fund house in November 2019. That is why we decided to take a closer look at the scheme.

We have spoken to an independent mutual fund advisor to find out how his views on the short-term underperformance of the scheme. We also reached out to the fund manager to get more details about the scheme.

After beating the benchmark and category average in five and three year periods, the performance of the scheme has fallenin the last one year. The scheme has offered 7.45% in 5 years, -4.94% in three years and -1.66% in one year.

1-year returns 3-year returns 5-year returns
L&T Emerging Businesses Fund -1.66% -4.94% 7.45%
Small Cap category average 13.87% -1.53% 6.56%
S&P BSE 250 SmallCap TRI 7.91% -6.11% 4.44%

Source: Value research

Top 10 holdings of the fund:

Company Sector Assets (%)
Persistent Systems Technology 4.27
Mahanagar Gas Energy 2.97
VST Industries FMCG 2.82
Sanofi India Healthcare 2.53
Suven Pharmaceutical Healthcare 2.51
Abbott India Healthcare 2.41
Ipca Laboratories Healthcare 2.40
Deepak Nitrite Chemicals 2.37
Navin Fluorine International Chemicals 2.23
Amara Raja Batteries Engineering 2.00

Source: Value research

Raj Talati, Founder, ABM Investment, a financial planning firm, based in Vadodara:

It is a top quartile fund if you look at the five-year rolling returns. If compared calendar year-wise, it is amongst top performers in 2015, 2016, 2017 and 2018. It has beaten S&P BSE Small cap TRI and small category category returns since inception with a wide margin. However, it is an underperformer in the category based on rolling returns in one to three years, mostly because of its underperformance in the last year.

It is a small cap fund managed in growth style. The fund is very well diversified across 94 stocks and sectors with top holding at 26.50% of portfolio. Present allocation is 41% to midcap and 59% to small cap, whereas average industrial allocation is 28:68. It is a good fund. So, we should wait for it to bounce back.

Venugopal Manghat, Head – Equities, L&T Mutual Fund:

L&T Emerging Business Fund is jointly managed by Venugopal Manghat and Vihang Naik. Manghat offers his perspective on the fund:

L&T Emerging Business Fund has a well-diversified portfolio. We focus not just on portfolio returns, but also towards its liquidity and risk parameters. The fund follows a disciplined investment approach where no major holding is attributed to one single stock or sector. This strategy has not just helped the fund in the past whenever there was broader market rally but also has given an advantage to the fund manager to deftly manage his portfolio. In the long run, it’s the earnings growth that has always been the key market driver and current rally in selected sectors/stocks may not sustain and fade sooner or later.

We continue to maintain our conviction on high quality companies with sustainable business models, with strong management teams, and producing predictable cash flows. As highlighted earlier, earnings growth will be the key market driver. We are confident of our portfolio quality and believe the same will play out.

Investors in small cap and mid cap funds should come with an investment horizon of at least seven to 10 years. Small cap stocks are excellent wealth creators over the long term, but also can be quite volatile in the short term. This volatility can be mitigated to a large extent and also the investment experience can be extremely rewarding if the investors stay for a longer time horizon.

The recent uptick in the performance of small cap funds is on account of rally in select mid cap and small cap companies/sectors such as seciality chemicals, agro chemicals, pharma, etcetra.

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