Over a dozen small cap mutual funds outpaced their benchmarks in past 5 years

Mutual fund investment is growing at a rapid pace in India. The year 2022 has been a fabulous year for equity mutual funds as many of them have beat their benchmarks.

The asset management companies (AMCs) added over 51 lakhs investors accounts in the June 2022 quarter and brought the total to more than 13.46 crore. In the comparison, 93 lakh accounts (or folios in mutual fund parlance) were opened in the March quarter, while a staggering 3.2 crore investor accounts were added in the last 12 months, according to data from the Association of Mutual Funds in India (AMFI).

Before investing in mutual funds it is vital to know which funds have beaten their benchmark. Even though mutual fund returns differ based on the category of funds they choose, one of the fair parameters to judge a fund’s performance is to compare its returns against the benchmark index.

In case the fund repeatedly beats the benchmark, it is seen as a good performer. On the other hand, if it fails to do so – it is seen to be lagging. We evaluate here the performance of small cap equity mutual funds against their corresponding benchmarks.

Let us first understand what exactly are small cap mutual funds:

Small cap mutual funds

A small-cap mutual fund is an equity mutual fund that invests at least 65 percent of its assets in the equities of corporations having a market size of less ₹5,000 crore. The term ‘small cap stocks’ refers to the stocks that are ranked 251 and lower. 

Small-cap mutual funds are extremely volatile, but they also tend to provide larger returns. The businesses that these funds invest in have excellent growth prospects in the future. Also, they often outperform large- and mid-cap mutual funds during a bull market.

Small size funds' equities have the ability to rise two or three times in a short amount of time. They may be the best option for investors with long-term objectives, such as financing a child's education, saving for retirement, paying off debt, etc. However, it is advised to conduct adequate research and base investments on one's risk tolerance, financial objectives, and liabilities.

What is a benchmark in mutual funds?

A benchmark is a baseline against which the efficiency of a mutual fund scheme is evaluated. It is a rough estimate of the returns that an investor's investment should have generated.

Benchmark indices are chosen by fund houses based on market capitalization and the sectoral or thematic strategies of the funds. Your mutual fund schemes should aim to outperform the benchmark's return; if they do, their performance will be regarded as successful.

In India, a benchmark index declaration is required for all forms of investment options. Sebi is in charge of enforcing this legislation on the financial market.

Why is benchmark important?

A benchmark index is important because it offers informative and a useful standard for evaluating mutual fund performance. Due to the fact that every fund manager strives to beat the fund's benchmark index over the long term, this enables investors to evaluate a fund manager's investment skills.

It is claimed that a mutual fund scheme has outperformed if it generates returns greater than the benchmark, and vice versa. On the other hand, your fund can still be considered to have beaten the benchmark if the benchmark index declines over a period of time but your fund's NAV declines less (in percentage terms) over the same period.

Here is the list of fourteen funds that managed to beat their benchmark indices in the past five years

(Source - AMFI data, July 12, 2022)

As we can see in the chart above, Quant small cap fund and Axis small cap fund were ahead of the benchmark index by over twelve percent, SBI small cap fund outpaced its benchmark index by more than eleven percent.