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Small-cap mutual funds invest predominantly in stocks of companies that do not figure in the top 250 in terms of market capitalization. Usually, the market capitalization ranges between Rs. 10 crores and Rs. 500 crores. These could be start-ups or companies catering to a niche market segment. They have a great potential to grow and hence can reward their investors with handsome returns in the long run. However, owing to their limited experience, exposure or resources their returns are subject to a high degree of risk and volatility as well. <br>
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Points to consider while opting for the best Small-Cap Mutual Fund Small-cap mutual funds invest predominantly in stocks of companies that do not figure in the top 250 in terms of market capitalization. Usually, the market capitalization ranges between Rs. 10 crores and Rs. 500 crores. These could be start-ups or companies catering to a niche market segment. They have a great potential to grow and hence can reward their investors with handsome returns in the long run. However, owing to their limited experience, exposure or resources their returns are subject to a high degree of risk and volatility as well. Read on to understand what factors you should take into account while selecting the best small-cap mutual fund for yourself. Most people know that they should opt for small-cap funds if they are ready for some risks and volatility. However, you also need to consider these below factors to make the right decision. 1. Performance Analysis Before investing in small-cap funds, it is important to analyze whether the fund has generated consistent risk-adjusted returns across various market cycles. Some factors that can help in this analysis are risk-return ratios and rolling returns over multiple periods such as 1-year, 3-year and 5year periods. You should also do a comparison of all the available small-cap mutual funds against their benchmark index under bull as well as bear market conditions. 2. Portfolio Composition Small-cap funds are inherently riskier than its cousins – large-cap and mid-cap. Hence, diversification becomes an essential factor for these funds. A well-diversified fund helps to bring down the risk quotient. On the other hand, a tightly concentrated portfolio which invests predominantly in a couple of stocks, ups the risk ante even more. You should try to pick small-cap funds which will help to balance your overall portfolio. 3. P/E Ratio The PE ratio is a good reference point regarding the growth potential of the fund. It also indicates how much is the fund overpaying for growth. PE is calculated by using the weighted average of the underlying stocks. A high value indicates that the scheme predominantly consists of stocks that have a valuation premium owing to their potential for growth. Small-cap funds with a P/E ratio value of more than 30x are generally considered expensive investment propositions. 4. Fund Management – Quality and Credentials
A good fund manager or fund house is to mutual fund investment what salt is to cooking - Indispensable. Hence, it is important to take into consideration the credentials of the fund manager/AMC. Aspects such as experience (especially in the small-cap or mid-cap segment), performance track record, investment approach, research capabilities, qualitative analytical skills, etc. should be a deal-breaker while selecting the best small-cap fund. 5. Frequency of trading activity While this might seem like an insignificant detail, it can increase your cost of investment and bring down your ROI. High churn or frequent trading leads to high turnover costs. Good funds usually tend to have portfolio turnover ratios below 30%. Now that you know the DOs you need to consider while selecting the best small-cap mutual fund, here are some DON’Ts as well. × Do not let “recency bias” creep into your investment decisions where you get lured by the recent performance numbers. Long-term market outlook should be the deciding factor. Do not blindly follow “star-ratings” or market rumors. Investment decisions are not popularity contests. You should not invest just because a relative or friend has opted for a particular small-cap fund. All your investments should be in sync with your own financial goals, risk appetite, and time horizon. Do not forget to consider your overall portfolio and its asset allocation. The small-cap investments should not skew the portfolio. Do not choose the basis of your investment the current or short-term market outlook. Always remember that these investments bear the sweetest fruits in the long term. × × × × Now that you know the magic mantra, you can make an informed decision. And the best part is you invest online in the mutual fund of your choice. So, no more excuses. Remember that fortune favors the brave!
