Small-Cap Mutual Funds are Equity funds that invest a minimum of 65% in equity or equity-related instruments of small-cap companies. Small-cap companies have small market capitalization and do rank after 250 as per SEBI regulation. Since these companies’ capitalization are relatively small, they have a very high potential to grow.
Therefore, small-cap companies have the potential to provide much higher returns than mid-cap and large-cap funds. On the other side, the risk factor possessed by these funds is also higher as small-cap funds can be volatile at times.
There are both advantages and risks included in this kind of fund. So, Let’s check about some best Small Cap Mutual Funds in India, how to select the right one, and some factors to consider before investing.
Why should invest in Small Cap Mutual Funds
Small-cap funds are known for high returns as they have a high probability of outperforming the benchmark. The market gets heavily influenced by these funds. Many risk-avoiding investors do not consider investing in Small-Cap funds due to their volatile nature but, If one is willing to take the risk, then investing in a small-cap fund for the long term can provide excellent returns.
- Small cap funds offer a larger scope to invest then mid cap or large cap funds.
- Small cap funds offer much better prospect in growth.
- These funds have much higher potential to gain market share and also tends to grow faster than mid cap or large cap funds at times of economic recoveries.
- In small cap funds, company specific factors effect the returns more than macro economic factors.
Who should invest in Small Cap Mutual Funds
Small-cap mutual funds are known for their potential to offer high returns and possess a higher probability to outperform the benchmark at times of the bullish market. However, when the markets enter a sharp decline, the NAV of these funds also get affected significantly hence, the market movements heavily influence these funds.
If you are ready for some risk to optimize the returns on your portfolio, then choosing to invest in Small-cap funds would fit ideal. By investing a small portion of your portfolio in small-cap funds for the long term can generate good returns. Risk-averse investors may not consider these funds due to the volatile nature of market fluctuations.
Best Small Cap Mutual Funds
Axis Small Cap Fund
- Invests by identifying long term opportunities.
- Invests primarily in hand picked small quantity of stocks from small cap companies for their high performance assumption in next several years.
- The fund selects funds on the basis of stability, quality and scalability.
- The fund prefers companies having strong corporate governance, transparent balance sheet and capability of sustaining good returns with low volatility.
SBI Small Cap Fund
- This fund house follows the balance of both growth and value of investment.
- Selects bottom up stocks to identify high growth business.
- Prefer businesses having scalability and beneficial as per Indian economy’s growth potential.
Nippon India Small Cap Fund
- Selects companies having strong management and rational valuation.
- Focuses on generating better risk balanced performance.
- For better risk management, this fund measures margin of safety and diverse stock selection.
- Prefers ‘Buy and Hold’ strategy for most of the times.
- Performs ‘Sell’ at times valuations become too high even if the stocks have long term growth prospect.
Kotak Small Cap Fund
- Invests in companies having successful products or services, potential to sustain above average earnings, low leverage, ability to generate free cash flow and simple business model.
- This fund has experience in various market cycles and prefer to stay out of cyclical stocks.
HDFC Small Cap Fund
- Prefers small cap companies with sustainable business, good financial strength and reasonable growth prospects.
- This fund prefer undervalued business also.
- Adopts quality metrics strategies like cash flow, return on equity, return on capital to identify opportunities.
ICICI Prudential Small Cap Fund
- Perform well research and analysis to invest on small cap companies having potential to generate high returns.
- Focus on price discovery to identify small cap stocks below their full potential.
- Select stocks depending on sector opportunities, leverage, return on equity, earning capacity and sensitivity to various other economic factors.
Risk possessed by Small Cap Mutual Funds
Small-cap funds are actually a class of equity funds. Hence, these funds also carry the same risk factors that any other equity fund scheme includes like market risk, concentration risk, and volatility risk. But, the higher the risk factor higher the return potentials get. For risk-averse investors, a Systematic Investment Plan would be a good choice. These schemes require a small number of disciplined investments over the long term.
If you want to know more and are willing to invest in SIP, then we have a dedicated post, just click here on SIP Meaning – SIP Calculator, Benefits, Returns to have better knowledge before investing.
Advantages of Small Cap Mutual Funds
Small-Cap Mutual Funds are relatively less scrutinized and traded by large investors for the growth and returns these funds offer, also having a good chance to discover undervalued stocks among small-cap companies for small-cap funds. These funds are volatile but generally perform well at times of market boom.
Considerations before investing in Small Cap Mutual Funds
You should always consider small-cap mutual funds that balance your portfolio and invest in Small-cap funds that invest in Small-cap stocks across various sectors. Always do avoid funds that invest predominantly in a few stocks and look at the trading frequency in the fund. Successful funds generally have portfolio turnover ratios of less than 30%.
At times of selecting the mutual fund to invest in, don’t just check the current performance regardless of how good they performed. Always check the track record of performance across both bullish and bearish market cycles for at least the past five years. If the performance was stable then you can rely upon it. But, keep in mind that record is just history and an indication of stable performance, not a predictable future.
Returns and risks
Undoubtedly small-cap funds carry risk, but some funds can manage risk better than peers. Explore options and the potential of gaining good returns from various schemes with low volatility. Do your research and pick those fund houses having a history of beating benchmark performances in both market highs and lows.
Purchase to Earn(P/E) ratio
Before considering a suitable fund house, always check the P/E ratio, It will give you an idea about the underlying growth potential and also shows the overpaying amount for the growth of that fund. Small-cap mutual funds having a P/E ratio above 30x are considered expensive.
When it comes to long-term investment options, small-cap funds have the possibility to provide better returns than large-cap and mid-cap funds as they invest in small companies which have the potential to grow large in terms of market capitalization in the future. In this post, we discussed some best Small Cap Mutual Funds and their advantage. We have suggested to help you in choosing but, always make your own decisions to invest wisely. It will help you to invest your money as per your risk management capability and your goals.