Best Small Cap Mutual Funds 2021

If you have always wanted to invest in small caps to take advantage of their exponential gains but have been afraid to invest due to the equally high and uncertain risks, buying a good small cap mutual fund may be your solution.

Small Cap mutual funds invest at 65% of their investment corpus in companies with smaller market capitalisation. Companies with less than 5000 Cr in market cap are usually considered small cap companies. According to SEBI, companies beyond the top 250 in terms of market capitalization are small cap companies.

Small cap mutual funds are capable of delivering fantastic returns, that are higher than the large and multicap funds. However, the companies that these small cap funds invest in can be highly unpredictable and volatile. Thus, returns from the small cap mutual funds too are extremely volatile and are often deemed riskier investments especially in the short to medium-term.

Small cap mutual funds should be invested in with a long term view, usually 7-10 years. Even then, small cap mutual funds should be a small part of your portfolio, not more than 20-30%.

For details read, 'How to achieve the right diversification in Mutual Funds?’

Strategies to pick the best small cap mutual fund

1. 1. Portfolio Composition: What separates the plethora of available small cap funds from each other, is what lies within their portfolios. A quick study of the fund goals, investment strategy and the kind of stocks/assets that it is investing in, will help determine what kind of risks we will be taking to earn that extra return.
2. 2. Assess returns: It is obvious that every investor enters the market to make high returns on their investment. For this to become a reality in the small cap fund market, it is important to assess returns based on the market conditions, the company's financial track record, or the economy in general. Small cap mutual funds have the propensity to outperform large cap and mid cap funds especially in times when the market is bullish.
3. 3. Ensuring diversification: By diversifying within the portfolios, individual's mitigate the risk of exposure to steep drops in the market value of an asset. Such drops can be off-set by a well-performing asset in the portfolio. Small cap funds can also be made the core portfolio since they go through predominant phases of ups and downs. So this will expose them to a calculated exposure thereby adding to the overall returns.

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Funds that hold a reasonable proportion of good quality companies are colour coded Green, while those with a higher percentage of companies marked as "risky" are shown in RED. Similarly, funds with a good return consistency are indicated as Green, while those with poor return consistency are coded Red.

More info in the video below:

1. 1. SBI Small Cap Fund: SBI small cap fund focuses on the bottom up approach to track businesses that showcase high growth potential. Investments are made through a blend of growth and value.
2. 2. Nippon India small cap fund: The Nippon India small cap fund opts for a buy and hold policy, builds a portfolio across various growth areas of the economy. It has a rather prudent system when selecting stocks, with risk management measures and margins of safety.
3. 3. DSP small cap fund: DSP small cap fund that takes a bottom up, buy and hold approach to investment. The fund manager invests in growth oriented companies that are proven industry leaders and boast of sustainable competitive advantages.
4. 4. Franklin India Smaller Companies Fund: Franklin India Smaller companies fund is a low risk alternative to other small cap funds. Reason being, its relatively high exposure to mid cap stocks. Although the fund has had a poor run in the last year or so, its long-term performance is quite good.
5. 5. HDFC small cap fund: The HDFC fund depends on sustainable businesses that have sound financial strength. Well-managed small cap companies with reasonable growth prospects. But there is also the fact that this small cap fund heavily prefers undervalued businesses. Using matrices to measure aspects like cash flow, return on equity, and return on capital, this small cap fund identifies the right opportunities.

Capital gains received within a one-year holding a mutual fund is known as short-term capital gains or STCG, which is taxed at a rate of 15 per cent. Long-term capital gains (LTCG), or a capital gains realised after a holding period of over a year, are exempt up to an amount of Rs 1 lakh. Over Rs 1 lakh, the gains will be taxed at 10 per cent.

Advantages:

1. 1. High Profits: One of the biggest advantages of investing in a Small cap fund is the possibility of earnings huge profits. The growth potential in a small cap company far outweighs that’s of a large cap company. Higher the growth, higher the subsequent market returns.
2. 2. Low Risk: While it is true that small cap companies have a higher growth potential, it is also true that they have a much higher chances of failure. For every single company that succeeds, there are 10 others that have failed. Investing through the mutual fund helps reduce your risk through diversification. Thus, even if one company fails, the impact at a portfolio level is minimal.
3. 3. Professional help: Since the chances of failure are extremely high in small cap investing, it is best to have professional advice. Mutual funds make this possible for retail investors at a very small cost.

Disadvantages:

1. 1. Volatility: Small cap funds come with a certain risk owing to its highly volatile nature. This is in contrast to large cap or multi cap funds that are relatively more stable.
2. 2. Long periods of underperformance: Small cap stocks and thereby the funds that own them too are often plagued with long periods of underperformance.

There are close to 350 equity mutual funds to choose from. For a retail investor, it becomes an uphill task to choose funds that are worth investing in. It is even more difficult to invest in them at the right time. MoneyWorks4me can make these decisions much easier for you.

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