Should you invest in Small-Cap Mutual Funds?

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After nearly around 3 years of muted performance, Small Cap Mutual Funds have been at the top of the chart for almost a year now. Looking at the growing returns, the category of an average has generated 120% returns in the previous year. According to the equity analyst, the reason behind the stellar returns & outperformance of small caps over the mid & large caps in the last 1 year is a remarkable valuation gap at the start of the rally.

Small-cap funds, which are generally seen to be high risk, high return investments, are achieving popularity among investors. The average return of small-cap funds over the past years is more than 100 %. However, market analysts believe that merely past performance may not be used as a direct indicator for future investment. Thus, an investor should also take at the other factors before selecting the funds.

The best performing scheme in this category of funds is Quant Small-Cap Funds which has given 217 % returns in the previous year followed by Kotak Small Cap Funds has generated about 139 % returns.

Small-cap funds are those that invest in shares of a company whose market capitalization is less than ₹5000 crore.

Small-cap funds have a higher risk and higher returns compared to other mutual funds as they invest in the young companies which have high volatility in the share prices. Small-cap funds required a longer period ( 7-10 years) as companies are generally in their early stages, which means funds need to be invested in a longer period to realize the potential of the companies. At present there are more than 4000 Co.s. after the top 250 Co.s. which are classified as small-cap.

Should you invest in?

According to the analyst, an individual should look at factors such as active return over the fund’s style, the performance on market down days, consistency of historical performances to its benchmark & qualitative parameters of the fund house and fund manager.

Small-cap mutual funds are meant for experienced investors who understand the underlying risk well. It is naive to invest in such high-risk schemes based on short-term performance. Experts ask investors to look at the returns from a long-term CAGR(Compound Annual Growth Rate). The most appropriate thing is to look at it from the last 5 years’ CAGR perspective and then one should make the conclusions of it and would notice decent gains of 15-17% in these schemes.

There will be growing with time and patience. Experts also suggested investors be highly selective and give weight to both fundamentals and margin of funds(MOF) in valuations while taking exposure to small-cap funds.

In end, investors need to understand that asset allocation should be assessed quarterly and it’s best to work and take the help of the financial advisor who can guide investors on the prospectus of various funds in different categories, on basis of their financial needs.

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