The returns from small cap mutual funds, over the last 1 and 2 years has been terrible, which might now begin to test the patience of investors in these funds.

Poor returns

In the more short term period of 1 and 2 years, the returns are bad, while the 3-year returns from some of these funds, is lower than that of fixed deposits. If in three years, small cap funds are not able to generate decent returns, investors might lose their patience.

Take a look at some of the returns from these funds. We have taken funds from the smaller cap that have larger assets under management.

What investors should do now?

In place of getting a lot more impatient, what investors should do is invest even larger amounts, given the way small caps have fallen. In fact, it looks certain that at some stage investors investors would once again begin to take a fresh look at small caps, following, which we might see better returns.

Even seasoned veterans are baffled at the way small caps have fallen off the cliff.

Noted investor, Porinju Velliyath, whose Star equity Investor, manages wealth in excess of Rs 1,000 crores is also baffled. "All the recovery we made from February 2019 lows has been sold into and we are back to the February levels. The longevity of the ongoing bear market in mid and small caps - of this magnitude has been astounding to even the most seasoned equity investors," Veliyath stated in the letter to investors. Porinju has been known to pick small cap stocks and churn solid returns in the past.

The real problem

The real problem for the markets right now is that investors want to hide in large cap stocks, while ignoring the broader markets. For example, a few stocks like TCS, Infosys, HDFC twins and Reliance Industries have pushed the indices to near record highs. The broader markets are languishing and nobody seems to be interested.

The only thing left now is to be exceedingly patient. At some stage, we might see some recovery in small caps, which is when small cap mutual fund investors could see some returns. Unless, mutual funds also start gradually looking at better managed small cap companies, as part of their portfolio, it is unlikely that we will see a recovery anytime soon.

However, we wish to emphasize once again, that it would be a bad idea to ignore small cap mutual funds, given that when there is a recovery, it can be fast and furious. In fact, small cap stocks are at attractive levels, which may lead to sudden buying interest.

GoodReturns.in