Investors are showing interest in small-cap funds of late, as is evident from the Association of Mutual Funds in India (AMFI) data. It shows that there has been an inflow of Rs 5,800 crore in July and August, and over Rs 10,300 crore in the April-June 2022 quarter.
This could be due to the fact that the Nifty small-cap index is down 17.5 percent year to date (YTD), thereby indicating a considerable underperformance in comparison to the Nifty, said Gopal Kavalireddi, Head of Research, FYERS, while talking exclusively to CNBC-TV18.com.
However, given the backdrop of rising interest rates globally as well as in India and high inflationary environment,
small caps may be subject to more volatility in the short term and are more vulnerable to the economic shocks.
Should investors continue with their small-cap funds journey?
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.
What should be the time horizon and strategy?
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.
This table shows the year to date, 1-year, 2-year and 3-year returns of some of the small cap funds:
| Scheme name | YTD | 1-year | 2-year | 3-year |
| Canara Robeco Small Cap Fund - Direct Plan - GrowthSmall Cap Fund | 5.80% | 12.30% | 48.73% | 39.07% |
| Bank of India Small Cap Fund - Direct Plan - GrowthSmall Cap Fund | -1.60% | 6.16% | 43.52% | 39.73% |
| ICICI Prudential Smallcap Fund - Direct Plan - GrowthSmall Cap Fund | 4.26% | 6.98% | 46.40% | 30.32% |
| Kotak Small Cap Fund - Direct Plan - GrowthSmall Cap Fund | -1.90% | 3.66% | 46.58% | 34.00% |
| Nippon India Small Cap Fund - Direct Plan - GrowthSmall Cap Fund | 2.15% | 9.72% | 47.99% | 33.46% |
| -0.62% | 8.27% | - | - |
| UTI Small Cap Fund - Direct Plan - GrowthSmall Cap Fund |
| Union Small Cap Fund - Direct Plan - GrowthSmall Cap Fund | 3.79% | 7.90% | 40.73% | 32.31% |
| Axis Small Cap Fund - Direct Plan - GrowthSmall Cap Fund | 1.53% | 7.02% | 40.79% | 28.95% |
| Tata Small Cap Fund - Direct Plan - GrowthSmall Cap Fund | 1.90% | 9.50% | 46.04% | 31.63% |
| IDBI Small Cap Fund - Direct Plan - GrowthSmall Cap Fund | 3.65% | 11.51% | 45.36% | 27.70% |
(Source: Moneycontrol)
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.
What are the top small cap funds to invest in?
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.
To conclude
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.
(Edited by : Shoma Bhattacharjee)
