scorecardresearchWhat are small cap funds and why should you invest in them?

What are small cap funds and why should you invest in them?

Updated: 12 Jul 2023, 09:15 AM IST
TL;DR.

Small cap mutual funds are volatile in nature and are not usually recommended for the faint hearted.

Investment advisors assert that allocation to small cap mutual funds should be a small portion of overall portfolio

Investment advisors assert that allocation to small cap mutual funds should be a small portion of overall portfolio

Nippon India Small Cap Mutual Fund limited subscription to its small cap scheme in view of the recent sharp rally in the small cap space and increased investor participation through high ticket investments.

The scheme’s total assets under management (AUM) has hit 32,700 crore.

Other small cap schemes which have a large asset size include SBI small cap fund (AUM of 18,900 crore) and HDFC Small Cap Fund (with AUM of 19,600 crore).

The massive popularity of small cap schemes seems antithetical to their volatile character. Small cap schemes are volatile as well as riskier than their larger counterparts. 

Let us first understand what small cap mutual funds are?

Small cap mutual funds

Small cap mutual funds are schemes which invest a minimum of 65 percent of their assets in small cap stocks. These stocks refer to the securities of companies ranked between 251 to 500 based on their market capitalisation.

There are 24 small cap mutual funds schemes with total net assets under management (AUMs) of 1.53 lakh crore as on May 31.

On the other hand, there are 31 large cap schemes and 29 mid cap schemes.

CategoryNumber of schemesAUMs ( crore)
Large cap312.51 lakh
Mid cap292.04 lakh
Small cap241.53 lakh

(Source: AMFI)

Why should you invest?

Of late, small cap mutual funds have delivered a high compound annual growth rate (CAGR) return.

Small cap mutual funds, as a category, have delivered returns that range between 16 to 30 percent in the past 1-5 years, shows the MorningStar data.

DurationReturn (%)
1-year30%
2-year16.04%
3-years39.87%
5-years18.33%

(Morning Star, as on July 6)

As we can see in the table above, small cap funds, as a category, delivered as low as 16 percent CAGR returns in the past two years, and as high as 39.87 percent in the past three years.

Experts believe that well-researched small (and even mid cap funds) carries a high earning potential over a period of time. Some of the small caps of today are mid-caps of the future, so a few of them do offer a great scope of earnings.

“One reason for which investors tend to choose small and mid-caps is that they offer diversity. Out of the investing universe of 500 stocks, 400 fall in the mid and small cap space, while only the top 100 are large caps,” says Sridharan Sundaram, Founder of Wallet Wealth.

 

Article
Here we share a few points of distinction between mid cap and small cap stocks
First Published: 12 Jul 2023, 09:15 AM IST