The rumours about higher valuations in the small-cap segment and the recent volatility in the market are forcing many investors to accept that a correction may be around the corner. Mutual fund managers and advisors say that valuations are high, but investors can continue to invest in small-cap schemes to create wealth over a long period. According to many mutual fund advisors, though the small-cap segment has risen sharply in the last six months, investors can still invest in these schemes in a staggered manner to create wealth over a long period.
Small-cap schemes invest in very small companies or their stocks. As per Sebi’s mandate, small-cap schemes must invest in companies that are ranked below 250 in terms of market capitalisation. These schemes will also have to invest at least 65% in small-cap stocks. Small companies go through a lot of ups and downs, more so than established companies in the large- and mid-cap segments. This is why investing in small-cap stocks is considered extremely risky; the small-cap segment can also be extremely volatile, especially in the short term. This is why small-cap schemes are recommended only to aggressive investors with a very high risk appetite and a very long investment horizon.
Should I invest in small-cap funds?
Wondering why anyone would take such a risk by investing in small-cap schemes? These schemes also have the potential to offer very high returns over a long period. For instance, the small-cap category offered an average return of 19% over 10 years. However, to pocket such fabulous returns, you need to be prepared to take on a lot of risk and volatility.
It is not very easy to identify winners in the small-cap segment. Many of these companies are unknown and, moreover, have not been sufficiently researched. Their management can be unscrupulous and make big claims that may be false. Sometimes, management, together with market operators, can drive up prices. These are some of the reasons why the market rewards and punishes these companies disproportionately.
If these companies succeed, the market will go after these stocks and investors will suddenly have stocks that have risen in price in their portfolio. However, if they fail, the stocks will be badly damaged. Overnight, they can turn into complete failures. In short, investing in small-cap companies is not a cakewalk. You will need to find successful fund managers who specialize in small-cap stocks. You should also pay attention to how the schemes performed during the market crash. Below are some small-cap schemes that you can invest in to build wealth over a long period. Follow our monthly updates to track the performance of these schemes. Axis Small Cap Fund The plan has been in the third quartile for 16 months now. Before that, the plan had been in the fourth quartile for two months. SBI Small Cap Fund It has been in the third quartile for the past five months.
Best Small Cap Funds to Invest in September 2024:
Our methodology:
ETMutualFunds has used the following parameters to select the equity mutual fund schemes.
1. Moving average returns: Filmed daily for the past three years.
2. Consistency over the last three years: The Hurst exponent, H, is used to calculate the consistency of a fund. The exponent H is a measure of the randomness of a fund’s NAV series. Funds with a high H tend to exhibit low volatility compared to funds with a low H.
i) When H = 0.5, the return series is said to be a geometric Brownian time series. This type of time series is difficult to forecast.
ii) When H < 0.5, the series is said to have mean reversion.
iii) When H > 0.5, the series is said to be persistent. The higher the value of H, the stronger the trend of the series.
3. Downside risk: For this measure we have only considered the negative returns contributed by the mutual fund.
X = Returns below zero
Y = Sum of all squares of X
Z = Y/number of days needed to calculate the relationship
Downside risk = square root of Z
4. Superior performance: It is measured by Jensen’s Alpha for the past three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). A higher Alpha indicates that the portfolio’s performance has outperformed the returns predicted by the market.
Average returns generated by the MF Plan =
[RiskFreeRate+BetaoftheMFScheme*{(Averagereturnoftheindex-RiskFreeRate}[Tasalibrederiesgo+BetadelesquemaMF*{(Rendimientopromediodelíndice-Tasalibrederiesgo}[RiskFreeRate+BetaoftheMFScheme*{(Averagereturnoftheindex-RiskFreeRate}
5. Asset size: For equity funds, the asset size limit is Rs 50 crore.
(Disclaimer: Past performance is no guarantee of future performance.)
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