Small-Cap Mutual Funds have delivered some of the highest returns in the mutual fund category over the last 10-12 years. But they have also given the lowest/most negative returns in the last few years? And this confuses most people – should they still invest in Small Cap Mutual Funds? Is it the right time to start SIP in Small Cap Funds?
In this video, we look at what are small-cap funds, what kind of stocks they invest in and what is the reason behind all these ups and downs in their returns. Most importantly, we answer if you should invest in small-cap funds and if yes, what things you should keep in mind. So, before you go and invest in the best small-cap mutual fund, watch this video.
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For some time now, Small Cap Mutual Funds have been giving negative returns but long-term their longterm performance has been very impressive. So should you invest in Small Cap schemes?
Come, let us find out.
From 2017, this is how SEBI, the body that regulates Mutual Funds, defines companies by their size or market caps -
-Top 100 companies by size are known as Large-cap.
-Next 150, as midcap.
-Stocks beyond 250, as Small Cap.
As per rules, Small cap mutual fund schemes must invest at least 65% of their assets in Small Cap stocks. The companies in this category have the highest growth potential, since these companies are young, and seek to expand aggressively. These companies have the potential to become mid-cap or even large caps in a few years, bringing investors better returns.
Take the example of Kotak Mahindra Bank- in 2001, it was a small-cap and had a market cap of fewer than 500 crores, and today it is more than 2 lakh crores! Amazing, right? But this high growth comes with higher risk too, as these companies get affected more in tough market conditions when compared to mid and large caps
So, Small-cap funds may serve you best if you have a long-term horizon.
Why? Come, let’s find out.
We looked at the Rolling returns of Small-Cap funds category for the last ten years and here’s what we found: If someone started on any given dates in these 10 years and stayed invested for at least 5 years, then there was not even a single time they lost their money!
As a matter of fact, during this period around 70% of the time, the returns were above 15%!
Here’s what we noticed:
Small-Cap schemes have given of 18.6% average returns annually for an investment horizon of 10 years. There was more than 90% possibility, you must have received more than 12% returns in 5 years
So, if you invest in Small Caps, don’t get fazed by volatility or sharp unexpected movement in returns. Enter only if you have at least a 7-year investment horizon, and accept market swings as part of the long-term journey to accomplish your financial goals.
Hopefully, now you would have got more clarity about Small Cap funds. Would you like to invest in Small Cap funds? Tell us in the comments section.
