Small Cap Funds Made A ComeBack: How Should You Approach Them?

On all of the small cap funds the return on a 1-year basis are highly enticing of above 10 percent to even 73% as in the case of Quant Small Cap fund. So, how should you approach these funds now which cannot be a cup of tea of everyone by far.

And typically after outperforming their larger peers, while the trajectory from these funds is expected to remain as though, here is how you can approach these funds:

First of all let's understand where do small cap funds park money or investors' corpus:

Investments:

These are typically into small cap stocks i.e. all stocks except 250 stocks that are largest in terms of market capitalization.

What's driving the rally in small cap stocks?

After a bad performance over a period of time, these small cap funds are seeing a comeback on liquidity as well as the economy is seeing an improvement. Also, small firms have seen a better management in operation ever since the demonetization attempt in 2016 and GST introduction in the subsequent year.

Why so much volatility in case of small-cap funds or stocks?

These funds unlike large cap stocks are not equipped to confront external and internal adverse condition without being much affected. Also, there may be liquidity issues which in case of even a small outflow or inflow may lead to high gyrations in stock prices.

Should You Invest In Small Cap Funds?

Now to be a part of this small cap funds and also limit your exposure to such highly volatile funds, you can cap your exposure in them to maximum 15 percent which is equal to their constitution of the overall cap. Long term exposure of say 10 years can also curb the high volatility for you in these funds.

Also, for averaging your cost, you can take exposure into such funds either by STP or SIP route.

Further, for better returns from such funds you need to be either taking such investment for long term perspective or book profits as and when you have a high allocation in them.

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