To cut the story short, let's begin our discussion with what are Small Cap funds and how and why should one invest in them?.
What are Small cap mutual funds?
These funds typically invest in companies falling below 250th companies in terms of market capitalization. And these small cap companies where one can invest can be judged in terms of P/E when these P/E ratios typically become overvalued investors should be exiting from their holding in small cap funds.
Now why should investors invest in small cap funds?
These small cap funds typically park money in companies that have the potential to grow big and can in fact turn multibaggers for investors by turning their course from a small cap to a large company.
Last some year's performance of the Nifty Small cap 100 index and what it highlights?
On Friday (May 21, 2021), Nifty small cap 100 index notched new 52-week highs of 9133, this is a phenomenal gain in 1-year of 137 percent, considering the index' close on May 22 of 3850. Also over a period like that from 2008-2017, they gave a returns of about 400 percent. So, if one stomach in the volatility these mutual funds also offer an opportunity to make money substantially.
Top Best Small Cap Mutual Funds And Their Past Returns In Charts:
Note we have taken SIP investment into perspective and returns mentioned are annualized returns:
|Small cap fund||AUM||NAV as on May 21, 2021||1-year||3-year||5-year gains in %|
|Union Small Cap Fund-Regular Plan-G||445 cr||23.19||91%||34%||20%|
|Aditya Birla Sun Life Small Cap fund D-Growth||2589 cr||50.66||103%||28%||15%|
|Axis Small Cap Fund Direct Plan-G|
|Kotak Small Cap Fund- G||3712 cr||144||120%||42%||25%|
|Nippon India Small Cap Fund-Growth||13085 cr||65.99||110%||36%||23%|
1. Union Small Cap Fund-Regular Plan-G:
It is a CRISIL4-star rated fund . Expense ratio is of 2.57 percent and some of the fund's top holdings are in stocks Happiest Minds, Navin Fluroine, CSB Bank, Rossai Biotech, Greaves Cotton etc. Lump sum investment has to be for Rs. 5000 while the SIP in the fund can be started for as less as Rs. 2000.
2. Aditya Birla Sun Life Small Cap fund Direct –Growth:
It is a 2 star CRISIL rated fund. Expense ratio of the fund is 1.11% and the scheme in a 1-year period has underperformed its index with gains of 121% considering one time investment. Top holdings of the fund include Deepak Nitrite, Cyient, JK Cement, Just Dial, Radico Khaitan etc. Minimum one time investment as well as SIP investment in the fund is fixed at Rs. 1000.
3. Axis Small Cap Fund:
It is a CRISIL 4 star rated fund indicating good performance over peers. Expense ratio is at 0.41%. Minimum SIP investment can be made at Rs. 500 while for lump sum the investment has to be of Rs. 5000. Top holdings of the fund Galaxy Surfactants, Tata Elxsi, Fine Organic, Brigade Enterprises, JK Lakshmi Cement etc.
4. Kotak Small Cap Fund- G:
It is a CRISIL 5-star rated fund with expense ratio of 0.57 percent. The SIP contribution in the fund can be started with Rs. 1000 and for one time Rs. 5000 investment is needed. The fund's holding include Century Plyboards, Carborundum, Sheela Foam, Supreme Industries, Persistent Systems among other.
5. Nippon India Small Cap Fund-Growth:
This is again a 3-star rated CRISIL fund. SIP in the fund can be started for just Rs. 100 and for one time one needs to invest Rs. 5000. The fund's allocations are in Deepak Nitrite, Tube Investments, Bajaj Electricals, Navin Fluorine, Balrampur Chini Mills.
Points to note when considering investment in small cap mutual funds:
1. Longer tenure of 7-10 years.:
As the small cap mutual fund category exposes one to high volatility and risk, one can delve in the only if they wish to possibly earn a higher return and have a longer tenure of 7-10 years. This is also because if they happen to incur losses they may be in a position to recover losses to some extent if not fully.
2. Include this mutual fund category only to may be supplement your returns:
Here the need be that you take a calculated risk to add up to your investment portfolio by adding small cap mutual funds as these do not earn stable returns.
3. Diligently identify small companies, fund managers:
Select the small companies who have strong fundaments and go with fund manager and AMC that have emerged winners in delivering good return in their space.
4. Do not invest in them only in the lure of small cap funds delivering big:
As in the current scenario, while average return on these schemes is over 100 percent, just don't get into them as current or past performance should just not be the sole measure for picking a stock or mutual fund for that matter. There is a cycle for every category to outperform and currently it is the small cap that have been rallying.