Small-cap funds, which are typically seen to be high-risk, high-return investments, are gaining popularity among investors. After a muted performance for the last couple of years, small-cap mutual funds have been at the top of the charts for close to a year now.
The average return of small-cap funds over the last year is more than 100 percent. However, market experts believe that past performances may not be a direct indicator of future ones. Thus, investors should look at other factors before selecting the fund.
Before dipping into the details, let’s first understand what are small-cap funds and which funds have performed well in the last three years:
Small-cap funds are those that invest in shares of companies whose market capitalisation is less than Rs 500 crore.
The top 3 small-cap funds that have performed well over the past 3 years are (as compiled by Anup Bansal, CIO, Scripbox):
|3-year return rank||Small cap funds|
|1||Quant small fund (G)|
|2||Axis small cap fund-Reg (G)|
|3||Kotak small cap fund (G)|
But what should be the investing parameters when it comes to small-cap funds?
According to Bansal of Scripbox, individuals should look at factors such as the active return over the fund’s style, the performance of the fund and the risk it takes to deliver that performance on market down days, consistency of historical performance to its benchmark, and qualitative parameters of the fund house and the fund manager.
Talking about the exposure of small-cap funds, Bansal says that it should be about 5-20 percent. “It is important to note that every investor’s risk profile is different. Unless the current allocation crosses more than 5 percent above the designated allocation due to the recent market rally, there is no need for them to rebalance. They should also ensure that allocation is in highly ranked funds. Switching to better-ranked funds is always preferable,” he suggests.
Meanwhile, Adhil Shetty, CEO, BankBazaar.com, calls small caps highly volatile. He believes that unless an individual is a sophisticated investor who understands the underlying risk well, small-cap funds may not be his/her ideal choice.
"If investors have a high-risk appetite, they can consider investing some portion of the portfolio, typically not more than 5-10 percent of the overall portfolio, in small caps in a staggered manner," Shetty advises.
According to Shetty, investors should consider abnormally high returns with a good bit of scepticism.
“The resurgence in returns of small-cap funds, in comparison to early FY21, seems inflated. Investing in high-risk schemes ideally should not be based on short-term performance. We cannot expect this kind of returns to repeat year on year," he explains.
To conclude, investors need to understand that asset allocation should be reviewed quarterly and it is best to work with a financial adviser who can guide investors on the prospects of various funds in different categories, basis their financial needs.
Disclaimer: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.
(Edited by : Akanksha Upadhyay)