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Small-cap funds and their splendid returns are the trending news in the market nowadays. Yes, the performance over the past year of small-cap funds has attracted investors more towards them. The small-cap category has delivered around 98% returns in one year.
The fund assets have been benefitted in two ways, first by the incremental investments of investors and second by the rising stock prices. The asset size of the category as of May 31, 2021, is Rs 80,379 crore.
After this momentum shown by small-cap category funds, investors are in a position to decide whether they should invest more or redeem or go slow while investing in these funds? Let us see what strategies investors must follow now while investing in small-cap category funds!
Rally Is Broad-Based And Not Confined To One Or Two Scheme!
Earlier when the small-cap category rallied in the financial year 2018 and 2019, it was limited to a few stocks, however, this time the rally is broad-based and can be seen across different segments.
Since March 31, 2020, the Nifty Small Cap 250 TRI has risen 164 percent, compared to 86 percent gains recorded by the Nifty 50 TRI. The experts say that when the market showed correction in March 2020, among the equity category funds, small-cap funds saw a larger cap correction compared to the large-cap funds, however, they have also bounced back in the market more than the large-cap funds.
Scheme Size Rise!
Splendid returns from small-cap category funds have made inverts flocked in them. They have actively invested in these funds that have resulted in a good rise in the asset value of these funds. Out of all the small-cap schemes available to invest in, 7 small-cap schemes are managing more than Rs 5,000 crore each asset value.
The fund with the largest asset value among these seven small-cap schemes is the Nippon India Small-cap fund that manages Rs 14,318 crore.
However, the Chief Investment Officer-Equities, Edelweiss Asset Management, Harshad Patwardhan, says that the liquidity of stocks is the utmost important thing while investing in small-cap funds. If the manager ignores the liquidity matter in search of returns, the investor may find it difficult to sell the units in case if the fund faces a correction suddenly.
Reverting on to this matter, Samir Rachh, who manages Nippon India Small-cap, said in an interview that the Nippon India Small-cap fund has a well-diversified portfolio of 120 stocks that provides adequate liquidity.
Further experts say that investor’s participation in small-cap funds and the rise in market capitalization of small-cap funds have worked towards improving the liquidity of these funds. However, before you pick a small-cap fund to invest in, do consider basic factors such as the inclusion of large-sized good-quality small-cap companies and 5-6 percent held in cash, considering these will help maintain liquidity despite the growing size of small-cap schemes.
Outperforming Benchmark Index, Still A tough Game!
Small-cap funds performed well and gave spectacular returns, however, most of these schemes find it difficult to outperform the benchmark index. They failed to out-perform, the Nifty Small Cap 250 TRI that clocked 106 percent over the last year. Regarding this experts says that in the last few years there have been several changes in economic growth and some funds kept moving upward. Here, the government needs to look at bringing policies that focus on economic growth and ensure that it will be broad-based in the next few years. This will in turn help many small-cap companies post good profit growth.
Also, experts advise investors of small-cap funds to moderate their returns expectations in the future. They say, as the COVID cases are going down, vaccination drive is going up, and normalcy 2.0 is gearing up, the economy is expected to grow and corporate profits are expected to be healthy in the coming future. Thus, here a long-time frame investing is required from investors in small-cap funds.
Final Say…
Investors who have enjoyed enormous profits from their small-cap fund portfolio can take off some gains. If you are closer to achieving your goal, it makes sense to sell units and move the money to safer avenues. However, if you are far away from reaching your goal, I would suggest investing in the long term.
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For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).