Out of the approximately 5,000 listed companies in India, 4,750 or 95% are small cap companies. These are companies with a market cap up of roughly Rs 10,000 crore according to the latest list released by the Association of Mutual Funds of India (AMFI). Investing in small cap funds opens up a huge investment universe to you and a vast degree of growth potential. In this blog, we tell you just how you can maximize this potential by picking the right small cap fund.
Performance vs Benchmark
Your first point of call should be a check on how the fund has performed against its benchmark. An out-performance over a sustained period of 3-5 years is a good indicator of fund quality.
Performance vs Peers
The fund’s performance versus its category average (average of similar funds) is another important indicator of fund quality. A high performing fund would have delivered better returns than its category average. The definition of peer can change with different research organisations and analysts check on this metric across a few sources which will give you a good idea of fund quality.
Small cap funds have to be nimble enough to get in and out of small companies without being impaired by the lack of liquidity. For instance, if a fund invests Rs 100 crore in a Rs 1,000 crore company, it will not be able to easily exit its position. Large funds will hence be forced to stay at the ‘large end’ of the small cap world or pay the price for the liquidity deficit in small caps.
Fund Manager Experience
Due to the vast small cap universe, scope for the fund manager to make or break the fund is also huge. Unlike large or mid cap funds, where a fund manager’s room to man-oeuvre is limited. You should look at how long the fund manager has been in charge. Also check whether he has been in charge during the fund’s best and worst periods. For new fund manager, check his previous record with other funds of the same or different Asset Management Company (AMC).
You can find the returns of a few high performing small cap funds below:
|Fund||1 year return||3 year return|
|L&T Emerging Businesses Fund||12.1%||24.7%|
|Reliance Small Cap Fund||16.6%||23.8%|
|SBI Small Cap Fund||22.0%||23.4%|
|HDFC Small Cap Fund||24.2%||23.3%|
*Source: Value Research, Direct Plans only, data as on 27/08/2018