Are Small Cap Mutual Funds a Good Investment?

Are Small Cap Mutual Funds a Good Investment?

Roboadviso     Mutual Funds     Posted On, Mon 11th June, 2018     1 comment

A lot of investors, particularly those who have just begun investing, tend to lay their bets on small-cap mutual fund (MF) schemes so as to get the maximum returns. The primary aim of such investors is getting high yields on investments made and hence many of them do not tend to be unduly concerned about the risk and volatility associated with such MF schemes. Now the main question that arises is whether small-cap MF schemes actually end up offering fantastic returns as imagined by a large section of investors!

In order to verify the validity of the claim, we can take resort to empirical proof. We checked out the 3, 5, and 10 year returns of eight small-cap mutual fund schemes. After checking the figures, we found that 2 of the 8 mentioned MF small cap schemes offered returns of 100 percent in a 3-year period which ended on 31st April, 2018.

Thus, for example, individuals who put in a sum of INR 1 lakh in small cap L&T Emerging Businesses Fund in April 2015 ended up making a corpus of nearly INR 2.10 lakhs in April 2018. In the same time period, another small-cap MF scheme called SBI Small Cap Fund also offered a little more double the returns on an INR 1 lakh investment; investors thus got a corpus of more than INR 2.00 lakhs on their initial investment.

Reliance Small Cap Fund, which as the name suggests is a small-cap MF, nearly managed to double the returns in the 3 year period. It offered a return of just over 99 percent on the investment made 3 years ago. It is important to note that this astounding performance by the small cap schemes was not matched by any mid-cap, large-cap, or multi-cap MF schemes during the same period.

In the five year period ending 31st April, 2018, 3 small cap MF schemes offered 4 times the return on investment. Thus, an investment of INR 1 lakh in Reliance Small Cap Fund, 5 years ago, saw a growth to a corpus of nearly INR 5 lakhs in April 2018.

During the same 5 year period, the initial investment grew to more than INR 4.70 lakhs with SBI Small Cap Fund, while it grew to over INR 4.30 lakhs with DSPBR Small Cap Fund. A lot of other small cap MF schemes, like Sundaram Small Cap Fund, HSBC Small Cap Fund, and HDFC Small Cap Fund, offered 3 times the return on investment during the same period. A lot of midcap MF schemes did manage to offer triple the return on investment during this 5 year period. However, their performance was still not as good as the toppers in the small cap MF schemes category.

In the ten year period ending 31st April, 2018, an absolute return of nearly 1,100 percent was offered by DSPBR Small Cap Fund over the past 9 years. Thus, people who had put in INR 1 lakh in this small cap fund saw an increase in their investment to a corpus of nearly INR 12 lakhs in 9 years. The corpus created by HDFC Small Cap Fund and Sundaram Small Cap Fund during the same period of an investment of INR 1 lakh was over INR 6.65 lakhs in 9 years, while over INR 5.40 was made by the HSBC Small Cap Scheme.

During the same 10 year period, the performance of mid-cap MF schemes was also commendable. In a lot of about 28 mid-cap MF schemes that were studied, 24 funds were found to have increased the investment by 5 times, while 16 mid-cap schemes had increased it by six times. This performance can be considered to be similar to the performance of small-cap MF schemes. Again, the main point to note was that despite the incredible performance of mid-cap funds over the 10 year period, not one mid-cap scheme could come close to beating the toppers in the small-cap category during the same period. The highest corpus that a mid-cap MF scheme managed to make was nearly INR 9.20 lakhs in 9 years.

From the above example, it can be safely deduced that small cap MF schemes outperformed other MF categories in the short-term period. However, in longer investment period of 9 or 7 years, a lot of mid-cap MF schemes offered returns that were comparable with the average yields of small cap MF schemes. Mid-cap funds were however never able to outperform small-cap category toppers in any of the time periods mentioned above.

The above example and associated studies are ample proof of the fact that aggressively betting on small-cap MF schemes can help generate incredible returns on investments. However, investors who are averse to the high volatility and risk associated with small cap funds need not lose hope. They can still opt for investments in mid-cap MF schemes over a longer period and get a good return.

It is important for investors to know that performance of varied equity linked schemes is primarily dependent on the movement in the stock market. Additionally, the above example is limited by the fact that it is based on past performance of the funds. The past performance can be the basis of guaranteed good performance of the funds in the future!

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  1. First of all a great blog you’ve got here. I appreciate the time you have taken to write this blog .
    Sir , you have mentioned that past performance can be the basis of good performance of funds in the future.Can you please share some more factors regarding that.

    Your reply would be highly appreciated. Thank you!


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