Should you invest in small-cap funds — what the experts say

Commenting on the same, Saurav Basu, Head, Wealth Management, Tata Capital, said small caps are not trading at attractive valuations as compared to large caps. So, these funds should not be allocated more that 5-10 percent of the portfolio and investments should be done in a staggered approach to ride out the current volatility.

It’s important to note that small-cap funds have delivered higher returns in the long run despite volatility in short-term performance.

“This makes them ideal for longer time horizons for investments through SIP (Systematic Investment Plan) and STP (Systematic Transfer Plan) approach,” Basu said.

Also, as Kavalireddi said, a sustainably growing small-cap company with healthy pricing power and margins would turn into a mid-cap or a large-cap company over a period of time, offering tremendous scope for returns in the medium term and wealth-building in the longer term.

"Hence, investors can suitably be rewarded by having a longer time view of equity investments," he added.

Moreover, investors preferring the mutual route for investing in small caps are better off, relying on the competence and research capabilities of fund managers, to take the right decisions, to counter the volatile stock price movements and business cycles.

According to Kavalireddi, Quant Small Cap, IDFC Emerging Businesses, Canara Rob Small Cap, and Kotak Small Cap are some of the small-cap mutual funds that investors can opt for.

For most investors, it’s better to stick to large cap-oriented funds given the current market volatility. They can also look at investing in categories such as BAFs (Balanced Advantage Funds), without worrying too much about the market levels and valuations, Basu suggested.

Investors looking at mid- and small-cap stocks may consider investing in multi-cap funds as these funds have exposure across these categories.