Retail investors have taken a liking to small-cap funds, adding the largest number of folios in such schemes, reported The Economic Times.
Small cap funds added 3 million folios, with assets under management of this segment rising a fourth to ₹1. 33 lakh crore, showed the data from the Association of Mutual Funds in India (AMFI) showed that in FY23.
Many financial planners believe smallcap funds give a greater degree of freedom to fund managers as there are a larger number of companies to choose from. While a large-cap fund needs to have 80% of its portfolio in the top 100 companies by market cap, a mid-cap fund needs to have 65% in companies ranked 101-250 by m-cap.
By comparison, a small-cap fund needs to have a minimum of 65% in small-cap stocks, which are ranked 251 and below by market capitalisation, giving it a larger choice of companies. Small-cap funds also have higher allocation to segments like capital goods and manufacturing and lower allocation to financials.
In comparison, the broad indices like the BSE Sensex and Nifty 50 are heavy onfinancials. Financial planners believe based on their risk appetite investors can allocate 5-20% of their portfolio to smallcap funds.
“A large pool of companies is available in this space. Overlapping of portfolios is low across schemes resulting in good diversification. There is visible value addition by fund managers in terms of outperformance to the small-cap benchmark,” said Shital Shah, founder, AG Financial Services.
Shah believes investors could stagger their investments in the small-cap space over the next six months and recommends Franklin India Smaller Companies Fund, Kotak Small Cap and SBI Small Cap Fund to savers.
Over the past one year, small-cap stocks represented by the Nifty Small cap 250 index have lost 5. 1%. However, over two years it gained 30. 6% and over a three-year period gained 195%.
This correction and a pick-up in earnings post Covid has now made valuations in the small-cap space attractive.