As per SEBI mandate, small cap schemes are mandated to invest in companies ranked below 250 in market capitalization. These schemes should invest at least 65% in small stocks.
It is not so easy to identify winners in the small cap division. Many of these companies are unknown. They are also under-researched. Their leadership can be unscrupulous and they can make claims that can be hugely false. Sometimes the management can negotiate with the market operators to increase the prices. These are some of the reasons why the market rewards and punishes these companies disproportionately.
If these companies succeed, the market will be after these stocks and investors will suddenly have more bags in their portfolio. However, if they stumble, the shares will suffer a severe penalty. Overnight, stocks can be absolutely insane. In short, investing in small caps is not child’s play. You should find successful money managers who specialize in small cap stocks. You should also pay attention to how the plans fared during the market downturn.
Here are some small cap schemes you can invest in. Please follow the monthly updates to track the performance of these schemes.
Best Microfinance Funds to Invest in 2023:
ETMutualFunds has used the following parameters to list equity mutual fund schemes.
1. Average rolling returns: It has rolled over every day for the past three years.
2. Consistency over last three years: Hurst Exponent, H is used to calculate the consistency of a fund. The H exponent is a measure of the randomness of the fund’s NAV series. Funds with high H show lower volatility compared to funds with low H.
i) H = 0.5, the return series is said to be a geometric Brownian time series. This type of time series is difficult to predict.
iii) When H > 0.5, it is called continuous persistence. The larger the value of H, the stronger the trend of the series.
3. Adverse Risk: For this measure we have considered only the adverse returns of mutual fund schemes.
X = returns below zero
Y = sum of all squares of X
It is taken to calculate the ratio Z = Y/number of days
Low risk = square root of Z
4. Score: Measured by Jensen’s Alpha for the past three years. Jensen’s alpha represents the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the capital asset pricing model (CAPM). A high alpha indicates that the portfolio’s performance exceeds the market’s expected return.
Average returns under MF Scheme =
5. Asset size: For equity funds, the initial asset size is Rs 50 million.
(Disclaimer: Past performance is no guarantee of future performance.)