Small-cap funds are the darling of the mutual funds universe. They offer the potential for higher returns, but the volatility is also higher. Investors tend to get attracted to the average of 3-year returns of small-cap mutual fund schemes. They rarely understand the risk that comes with them, and end up selling at the wrong time.
The Rollercoaster Is the Feature, Not a Bug
Small-cap companies are the ones ranked 251st onwards by their market value. They are young in their life cycle and are smaller in size and therefore offer more room for growth. Similarly, the same feature makes them more vulnerable in case of market corrections. Large-cap funds may dip by 10%, but small-cap funds witness corrections of 25% or more.
Looking at the best small cap mutual funds in India’s returns of the last year, you can see how much each scheme has performed. From the lowest negative return of -8.79% (HSBC Small Cap) to the highest positive return of 15.15% (ITI Small Cap), there lies a huge variance. The same fund houses had variations in their portfolio, therefore giving disparate returns. If you had invested through an agent, you may have been let down by the information given by him or her and may have made a wrong decision.
Why Your Horizon Is Your Only Real Safety Net
There’s no way anyone can time the small-cap funds. The only hedge there is is the time passed between your investment and its realisation. A 3-year return on a small-cap fund scheme may seem decent, but in this period, there could have been months of steep downward trends and if you needed the money back in these times, there would have been panic selling on your part. A three-year strategy is fine for small caps; if you want to save your money for seven to 10 years, that’s even better.
These funds require a long-term outlook. If you have the guts to ride the fluctuations and have the patience to wait for the right time to sell, then small-caps are a good investment avenue for you. The funds that have survived for more than 10 years are the ones in which people have reposed their faith in during financial emergencies.
The Kotak Mutual Fund Example: Scale and Stability
In case of Kotak mutual fund small-cap, here’s what you should know. Kotak Small Cap Fund has been existing since 2005 and has amassed a corpus of over ₹19,600 crore. As on date, it is managed by Harish Bihani.
The direct plan has an expense ratio of approximately 0.64%. The 3-year returns are at 11.85%, and the 5-year returns are at 11.25%. It has been a consistent performer over the years. It has neither taken excessive risks nor been overly conservative in generating stable returns for its investors. However, the regular plan’s expense ratio is at 1.72%, which is significantly high. So, if you’re planning to invest in a regular plan, you’ll have to bear this additional cost.
The Rule of Thumb for Small Caps
Small caps should be a satellite part of your portfolio and not the core. These funds have the potential to help you beat inflation and give you much-needed diversification. If you’ve invested in large-cap and debt funds, then small caps can be a good addition to your portfolio. But remember, they shouldn’t exceed 10-15% of your overall equity.
Before investing in any scheme, make sure you check the expense ratio, the last 5 year rolling returns of the fund, and the number of stocks it holds. If it has a portfolio of 40-80 stocks spanning different sectors, you’ll have better diversification.
The bottomline message is simple – small-cap funds demand patience. If you can’t wait for the right time to book profits, it’s better not to get tempted by these funds. However, if you can, then small-cap funds can be a rewarding addition to your portfolio.
