Small-cap Mutual Funds

When you think investments, you generally think ‘stocks’ or ‘taxes’ or ‘safety’. Mutual Funds are the only option which can provide not only answers but excellent options that will clear any doubt you have. Why mutual funds? First, because they help you diversify, second equity-oriented mutual funds give you exposure to stock market movements. Whether you’re a new or an experienced investor, mutual funds are ideal for wealth creation and growth.

Equity mutual funds have portfolios based on market capitalisation (market-cap). Market-cap is the size of a company based on its current value. It is calculated by multiplying a company’s total outstanding stocks with the current price of 1 stock. There are main company sizes, large-cap, mid-cap and small-cap. Here’s a bit more about Small-cap companies.

Most small-cap companies are either starting-up or developing, with an asset size of typically less than ₹5000 crore. They have relatively fewer employees (large- or mid-caps) and a smaller customer base. Financial information on these companies is very difficult to get, however, they’re known to have lower revenues than their large- and mid-cap counterparts.

You’ll come across several myths about small-cap funds, most of them surrounding the risk and return factors. They’re largely misconceived as being nothing but ‘get-rich-quick’ schemes. We’re here to clear these doubts for you.

These funds have the highest rate of returns since they’re more competitive in terms of growth and expansion. These funds attract investors who are market experts and have a high to a very high appetite for risk.

Best Small-cap Mutual Funds

Small-cap Mutual Funds Recommended by Angel BEE

2017-2018 has been a turbulent and unpredictable year. We’ve seen tremendous market corrections and due to these, small-cap mutual funds have taken a beating; far worse than large- or mid-cap. However, an important thing to note, these funds have also given the highest returns—over 20%—in the last decade.

Of course, we do not recommend, you blindly invest in these funds. Just like with any investment, you need to begin by evaluating your risk tolerance and define your investment milestone. You’ll also need to thoroughly research each company of the portfolio you choose, before investing.

These funds are not recommended for conservative investors who look for steady and consistent returns. Small-cap stocks have the highest volatility among all three capsizes. Also, the investment horizon for holding these funds is at least 7 years. Since the companies are all in their nascent stage, any new development or expansion will take a realistic time-frame of a minimum 5 years before you see any significant progress. Here are our recommendations based on past performance:

Top Small-cap Mutual Funds in India

Until recently, small-cap stocks were those which were ranked 400 and upwards in Indian stock exchanges. Revised SEBI norms have now stipulated the ranking for small-cap stocks to begin from 250 upwards. What has happened with this move is, fund houses have suddenly increased subscription in small-cap mutual funds. Some portfolios are now re-opened and new ones have been introduced.

How does this help you? As an investor, you’re always looking for the best pick, now you have a choice of more quality stocks in your portfolio composition. Most fund houses recommend systematic investments spread over some months, rather than investing a lump-sum. This not only mitigates risks associated with volatility but also gives the highest returns. Here are our top picks:

Everything You Need to Know About Small-cap Funds

Small-cap funds have a 60% to 90% corpus in small-cap stocks. These stocks are of companies ranged from 250 and upwards in Indian stock exchanges and have an asset size of typically less than ₹5000 crore.

Small-cap companies are either starting up or developing, they have fewer employees than large- or small-cap companies.

These funds tend to respond quicker than large- or mid-cap funds to market movements. If you review past performance of some of these, they may appear to be volatile but have historically high returns in the range of 20% (or more).

You need to have a huge appetite for risk and set long-term financial goals for these funds. Volatile stocks mean that you may see drastic upward and downward movements in their NAV. You should be able to look past the volatility into a longer investment horizon. Holding your portfolio for at least 7 years is the best way to maximise returns and even out market risks.

Why Small-cap Mutual Funds?

• Safer Than Direct Stock Investment: The main reason people prefer investing in small-cap funds is, extremely high returns. Aggressive investors prefer these funds over direct participation in stock trading because of lower risk. Another reason for choosing these funds over individual stocks is diversification. These funds comprise of quality stocks hand-picked strategically. Each fund portfolio has a unique purpose in-line with investors’ risk profiles and financial goals.

• High Volatility and Even Higher Returns: Though volatility of these funds is extremely high, the returns on investment are higher than any other market-cap. The reason is, small-cap stocks tend to make huge losses in a bearish market, but also make benchmark gains in a bullish market. The profits outweigh losses for these portfolios, especially over a long period of time.

• Unexplored and Growing Companies: You should invest in these funds if you know you have the stomach for bearing market risks. All the companies are newly established, which makes them more attractive. Moreover, new companies are constantly looking for innovative growth and expansion avenues. If you prefer companies which are relatively new and growing rather than huge corporates, this type of fund is ideal.

Get Better Returns with Small-cap Funds

Small-cap mutual funds have been known to be the roller-coasters of equity-oriented mutual funds. Just as their downward spirals are dangerous, their upward trends are equally (or even more) thrilling. So, how do you make the most of your investment?

• Have a High Tolerance for Risk: To explore this investment avenue you need to have a moderate to high-risk tolerance. Even the slightest market correction has a huge impact on portfolios. Regular fluctuations in NAV are a common occurrence. Many expert investors turn market corrections into opportunities. Though downward market movements can be adverse, an upward market trend will give the highest returns for the same period as compared to large- and mid-cap funds.

• Longer and Realistic Investment Goals: Market experts and fund houses recommend holding investments in these funds, way beyond their lock-in period. Market situations are never constant, sometimes it takes longer for markets to recover. You should define realistic and longer financial goals (or at least 7 years) to get the best out of your investment.