Five Small-Cap Funds Deliver Up To More Than 30% CAGR Returns In Three Years

Some mutual funds have achieved CAGR returns of over 30% in the last three years, despite the BSE Small Cap Index showing only modest performance of 5-10% in one year. However, the index has delivered robust gains over the past three years, rising by roughly 70-75% in cumulative terms, translating to an annualised return of about 20-22%.

Look at the Small-Cap Funds with High returns

Bandhan Small Cap Fund

3-year growth: 30.97% CAGR
5-year CAGR Growth: 29.63%
SIP: Rs.100
AUM: 15738 crore rupees
NAV: Rs. 51
Expense Ratio: 0.40%
Sectors: 11
Stocks: Shoba Ltd, REC Ltd, South Indian Bank, LT Foods

ITI Small Cap Fund

3-Year CAGR Growth: 26%
5-Year CAGR Growth - 23%
SIP-
AUM-2622 crore rupees
NAV: Rs.31
Expense Ratio: 0.22%
Sectors: 10
Stocks: Acquitas Chemical, MCX, Cartrade Tech

Invesco India Small Cap Fund

3-Year CAGR Growth: 25%
5-Year CAGR Growth: 29%
SIP-500 Rupees
AUM: 8720 Crore Rupees
NAV: Rs.47
Expense Ratio: 0.40%
Sectors: 9
Stocks: Sai Life, Kims, Swiggy.

Quant Small Cap Fund

3-Year CAGR Growth: 22%
5-Year CAGR Growth: 32%
SIP-Rs.1000
AUM-29288 crore
NAV-Rs.278
Expense Ratio: 0.71%
Sectors: 11
Stocks: Reliance, Jio Finance, RBL Bank.

Nippon India Small Cap Fund

3-Year CAGR Growth: 21%
5-Year CAGR Growth: 29%
SIP - Rs.100
AUM-66136 Crore
NIV-Rs.188
Expense Ratio: 0.63%
Sectors: 11
Stocks: MCX, HDFC Bank, SBI.

Why Small Cap Funds Outperform

Small-cap funds are equity mutual funds that allocate most of their money (at least 80%) in small-cap companies as per SEBI direction. Small-cap companies are being ranked 251st and below in terms of market capitalisation, usually valued under 5,000 crore rupees.

Small-cap funds usually outperform, as they invest in smaller companies with huge growth potential and are not exposed to institutional analysts, providing room for fund managers to identify undervalued companies before the broader market catches on.

Having a relatively low valuation enables small-cap companies to outperform the market with shifting sentiments and favourable market conditions. Historically, small caps tend to outperform in a bull market with economic growth and favourable policies. As risks are high, small-cap stocks can deliver robust returns.

Risks

Investing in small-cap funds is generally considered riskier than mid- and large-cap funds due to their volatility, liquidity crunch, and vulnerability to economic shocks. Moreover, small-cap companies are less researched and may have weaker corporate governance standards. Large companies are likely to acquire many of them before they reach maturity.

However, high risks generate high rewards. Small caps can deliver outsized gains in a bull market but suffer heavily in downturns.

Considerations Before Investing

In addition to the past performance, it is advisable for investors to invest for the long term (5-7 years or more). Investors with a high risk appetite can opt for small-cap funds, as they are bound to withstand temporary losses without getting caught up in panic selling.
Experts advise investors to enter during the market corrections through systematic investment plans (SIPs), as an overheated market can push the funds to underperformance.

Don't put all the money in one basket. Balancing between small, mid, and large caps can help reduce risks and stabilise returns. It is also advisable to avoid investing money for urgent needs, as withdrawal from small-cap funds can be cumbersome, with having comparatively low liquidity.

As small caps have been less exposed to research, the fund manager's skill also plays a pivotal role in identifying potential stocks. So it is imperative for investors to look at the past performance and consistency before investing.

Analysing macroeconomic conditions before investing is crucial, as small caps are prone to policy shocks such as interest rate hikes, inflation and fiscal consolidation. SIPs assist in balancing entry costs and mitigate the risk associated with investing during market peaks. Lump-sum investments are riskier in small-cap funds.