{"id":128352,"date":"2021-06-10T10:45:27","date_gmt":"2021-06-10T10:45:27","guid":{"rendered":"https:\/\/precoinnews.com\/?p=128352"},"modified":"2021-06-10T10:45:27","modified_gmt":"2021-06-10T10:45:27","slug":"should-you-invest-in-small-cap-funds-3-tips-to-follow","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/business\/should-you-invest-in-small-cap-funds-3-tips-to-follow\/","title":{"rendered":"Should you invest in small cap funds? 3 tips to follow"},"content":{"rendered":"
Most investors should restrict exposure to this volatile segment to 10 per cent of their equity allocation.<\/strong><\/p>\n <\/p>\n Small-cap funds have enjoyed a massive run-up over the past year.<\/p>\n The category has turned in an average return of 109 per cent — the best-performing fund has yielded a humongous 201 per cent.<\/p>\n Many investors, however, are concerned whether the category has turned risky after such a sharp rise.<\/p>\n View returns in perspective<\/strong><\/p>\n Small-caps and mid-caps did not perform in 2018 and 2019.<\/p>\n They were recovering in 2020, when the first lockdown began in March, triggering a correction.<\/p>\n Small-caps fell again from an already low base.<\/p>\n “The strong performance of small-cap funds has been driven by reversion to mean after two years of weak performance,” says Vinay Paharia, chief investment officer (CIO), equity, Union Asset Management Company.<\/p>\n New investors entered the equity market in significant numbers last year.<\/p>\n “This segment’s performance can also be attributed to the exuberance of these investors,” says Paharia.<\/p>\n The small-cap category’s returns are not steep when viewed over a longer horizon.<\/p>\n “Over the three- and the five-year period, this category’s returns are in line with that of mid-cap and large-cap categories,” says Arun Kumar, head of research, Fundsindia.com.<\/p>\n Performance can continue<\/strong><\/p>\n Experts remain bullish on this segment’s long-term prospects.<\/p>\n “India is structurally a high-growth economy.<\/p>\n “Many smaller companies with differentiated or niche business models, operating in high-growth segments, are bound to do well,” says Paharia.<\/p>\n Valuations have turned expensive, but only in pockets.<\/p>\n “Many fundamentally sound companies in the small-cap space have robust business models and strong balance sheets.<\/p>\n “They are gaining market share at the expense of their weaker peers or the unorganised sector.<\/p>\n “These are the stocks investors are chasing,” says Sandeep Daga, managing director and CIO, Nine Rivers Capital.<\/p>\n He manages the Aurum Small Cap Opportunities Fund, a PMS (Portfolio Management Services) scheme that has delivered a one-year return of 201 per cent (as on May 31).<\/p>\n According to Daga, there is still a lot of value to be found in the small-cap segment in undiscovered ideas.<\/p>\n To assess valuation, analysts compare the market capitalisation of a segment with that of the entire market.<\/p>\n “If small-caps’ share rises above 15 per cent, it indicates they have turned expensive.<\/p>\n “At the start of 2018, it stood at around 19 per cent.<\/p>\n “At present it is at 11-12 per cent. So, they are still not too expensive,” says Kumar.<\/p>\n Book partial profits<\/strong><\/p>\n Most investors should restrict exposure to this volatile segment to 10 per cent of their equity allocation.<\/p>\n “If the weight of small-cap funds has risen above 15 per cent in an existing investor’s portfolio, he should book partial profit and bring it back to 10 per cent,” says Kumar.<\/p>\n New investors may enter these funds even at current levels.<\/p>\n “Allocate to the large-cap and mid-cap categories first and then enter small-cap funds, provided you have a moderate to high risk profile,” says Harshad Chetanwala, co-founder, MyWealthGrowth.com.<\/p>\n Only those who have a horizon of more than seven years should enter.<\/p>\n If the market corrects, say, due to poor corporate performance in the first quarter of 2021-22, these funds could take a hit.<\/p>\n “Avoid lump-sum investment and opt for the SIP route instead,” says Manish P Hingar, founder, Fintoo.<\/p>\n When selecting a fund, seek a consistent performer—one that has done well across at least one bull and one bear phase.<\/p>\n A steep fall during a bear phase indicates poor risk management.<\/p>\n Look for funds with quality stocks in their portfolios.<\/p>\n Sound portfolio quality will give you the confidence to hold on to your fund during the inevitable bear phases.<\/p>\n Finally, avoid funds that chase momentum and stick to those with low portfolio turnover.<\/p>\n