UTI Small Cap Fund: For Those Willing To Take The Risk

Why Small Caps?

Many investors investing in the markets would know that small cap stocks tend to offer greater returns, if the right stock is picked. Their returns are way superior to that of large caps, though they can also be highly volatile when it comes to returns.

Small caps offer diverse opportunities across sectors and there is an ability to invest in niches. Apart from this, most high networth individuals and mutual funds tend to invest in large caps, which means some of the small cap stocks are under-researched and under-owned. Some small caps of the past like Britannia and Heritage Foods have given whopping returns to investors.

The big risk

We wish to inform our readers that small cap funds are risky. Apart from this, the markets are at record highs with the Sensex nearing the 46,000 points mark. While the fund maybe good, the timing is not. We all know the simple mantra of investing, which is buy low and sell high. With the markets at historic highs, there is limited room for upside. Therefore, we suggest that investors remain cautious.

It is better to invest small sums in a small cap fund, rather than large sums. Should the markets fall, the NAV could dip and you may have better opportunities to invest. At these levels, both large caps and small caps remain risky bets. Having said that, UTI Mutual Fund has had a good track record and hence the faith in the institution remains. However, what is worrisome is the timing of the offer.

Good past track record

UTI has a very long standing track record. The UTI Midcap Fund has given returns of almost 30 per cent in the last 1 year and a 5-year returns of almost 10 per cent on an annualized basis every year. Here are some positives that investors could consider:

1) A true-to-label small-cap fund with a focus on scalable business models and long growth runway.

2) Portfolio with zero large cap names, however, amid cap growing to large cap may be part of the portfolio.

3) Small caps have limited coverage on the sell side. UTI covers a large cross section of companies in the small cap universe. Coupled with strong investment processes, enables this fund to benefit from such opportunities.

4) Fund maintains a well diversified portfolio and follows a patient approach towards companies in the portfolio.

There is no doubt that there is a scope to generate superior returns than large caps, though the element of risk remains.

About the author:

Sunil Fernandes has spent 26 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. Sunil's areas of interest include commodities, equities, mutual funds, tax planning and debt instruments. He is currently the Managing Editor of GoodReturns