Among concentrated markets, small-cap funds have underperformed. | Jobs Vox


While the Nifty has continued to make new lifetime highs in recent weeks, the performance of the broader markets remains weak. In the rally from the June lows, and indeed for many years, small caps have underperformed bluechip indexes. Here are the details of how small-cap funds fared in the last one year.

Category-wide comparison

In the small cap mutual fund (MF) category, there are 23 actively managed funds and four passive funds with a history of more than one year. Over the past one year, actively managed small-cap MFs have returned an average of 4.6 per cent, comparable to large and mid-cap funds that have returned around 4.5 per cent. However, over time, small-cap index funds have significantly underperformed large- and mid-cap funds. Due to the decline in the underlying indices, small-cap index funds gave negative returns of 6.5 percent and 4.4 percent for large-cap and mid-cap index funds, respectively.

Performance in category

In the small-cap category, 74 per cent of actively managed funds beat the benchmark index Nifty Smallcap 250, which remained flat during the year. Nippon India, Tata and SBI small cap funds were the best performers in the category and posted returns of around 11-12 per cent last year. Capital goods is one of these top performing funds and the financial has acquired a good share of assets for Tata and Nippon India small cap funds. SBI and Tata Fund have one of their major holdings in the services sector. Additionally, Nippon India and SBI funds have invested more than 10 percent of their corpus in the chemicals and consumer discretionary sectors, respectively.

Funds that have performed poorly over the period are IDFC Emerging Businesses Fund, ABSL Small Cap and ITI Small Cap Funds with negative returns for investors in the range of 2-5%. All three funds invest a good portion of their assets in services sector stocks, while ABSL and ITI have other top holdings in financials and capital goods. The IDFC Small Cap Fund also has materials and automobiles as its core holdings.

Investing in small-cap funds

Of nearly two dozen small-cap actively managed funds, 15 have a track record of more than five years. Active management and comparisons between benchmarks or funds It should be understood that the way small-cap funds operate is very different from that of large- and mid-cap funds. For large and mid-cap funds, the universe is 100 and 150 stocks respectively, while for small-caps the same is around 5,000 stocks and hence the scope of active management increases for small-cap funds due to very little overlap.

Small-cap indices have failed to participate in the rally enjoyed by large-cap indices since June. In recent months, when FIIs have turned to buyers, their preference has tended to be with large caps. However, small cap MFs have shown impressive returns over the longer term. The funds have consistently outperformed the benchmark index Nifty 250 small-cap and large-cap funds and delivered a category-average CAGR of around 19 percent, compared to 13 percent and 15 percent for large-cap MFs and the benchmark index respectively over the last 10 years. One could argue that things might have changed after 2018 and the category rules. However, even in the last three years, these funds have won the benchmark and received significant financial support.

Although seen as a vehicle for high growth and currently attractive, small-cap funds have high volatility and low liquidity, a risk generally borne by funds with high AUMs (assets under management). One should invest in small-cap funds only if he/she has a long-term investment horizon (more than seven years) and the ability to absorb high volatility and volatility. Investments are made in relatively unexplored stocks and therefore the strategies here can have a long gestation period. After exploring flexi-cap, multi-cap and equity-oriented hybrid funds, you can consider small-cap schemes over the years.


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