Mutual fund is an ideal investment vehicle for an investor who does not know much about investing. People invest in mutual funds to reap the benefits from diversification, which is handled completely by a fund manager professionally on their behalf.
What are Small -Cap Funds?
The “cap” in small cap stocks refers to a company’s capitalization as determined by the total market value of its publicly traded shares. Small cap stocks are generally defined as the stock of publicly traded companies that have a market capitalization ranging less than ₹500 crores.Technically speaking as underlying companies are young and seek to expand aggressively, they are more volatile and vulnerable to losses during down time in market. In a Small-Cap fund, fund manager can have exposure to stocks of small companies in the range of 65%-90%.
Small-cap stocks give individual investors an edge over institutional investors.This is because institutional investors prefer to purchases large- cap stocks due to its stability, while Investors hoping for aggressive returns will invest in these funds.
Further, fund composition plays a vital role and any impulsive decision will endanger your returns. It makes sense to invest in multiple funds, so you have diverse selection of small and mid-cap funds in your portfolio.
What an investor can Expect
In the last three years, market has seen the small category perform exceptionally well and has also attracted a lot of investor interest and money in this category.
Small-cap funds are presumed to have significant yet hidden potential to be a “multibagger” (Indian financial jargon for equity stock which gives a return of more than 100%) one day. But It comes with its own advantages and disadvantages. Times when market is not performing,small-cap funds suffer a lot as they are less-established and opt to move out of business. On the other hand, it’s a great investment avenue for those who can tolerate more risk and are looking for more aggressive growth.
We can also say that avoiding investment in small-cap fund can’t be a prudent way to deal with it. In fact such an escape might prevent you from enjoying its magical return generating potential. One must learn patience while dealing with these funds, else it won’t take long to erode the gains made by your portfolio owing to faulty switches or redemptions.
Benchmark index of small cap for last 10 years
|1 years||3 years||5 years||10 years|
BSE Small Cap
Prospective Investors and Time Horizon
Investor who have the capacity to stomach higher risks can consider investing in this category. One must have a small composition allocated in his/her portfolio towards small-cap funds. When an investor is creating a stock portfolio for himself, it is important to have a benchmark against which you can compare your returns.Comparing against a benchmark allows an investor to accurately gauge the actual performance of his or her portfolio. The best strategy to reduce risk can be investing through an SIP (Systematic Investment Plan).
Small cap fund require you to stay invested for a long term, when we say long term you may consider this option for a time horizon of 7-10 years.
Top performing Small-cap funds and returns
|1 year||3 year||5 year|
|L&T Emerging Businesses Fund – Regular Plan||2.12%||59.9%||26.9%||–|
|Reliance Small Cap – Regular Plan||2.00%||58.0%||24.5%||35.5%|
|Franklin India Smaller companies – Regular Plan||2.44%||39.77%||19.20%||29.9%|
The Bottom Line
With the broad market move higher over the past several weeks, many traders have started to turn their attention to asset classes such as small cap stocks which are very risky. It is rather better to stick to multi-cap funds as these funds also have exposure to small-cap stocks in their portfolio. People shouldn’t forget that during the year 2008 when market was down, small-cap funds fell by almost 70-80%. Although a market like that doesn’t come too often, such a colossal loss might affect you very badly.
You can also read about: