Bank of India Small Cap Fund, the topper in the list, offered 30.81% in a five year period. Edelweiss Small Cap Fund offered 29.09% during the same time period.
Canara Rob Small Cap Fund offered 26.93% in a five year horizon. Tata Small Cap Fund gave 26.08%.
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Nippon India Small Cap Fund, the largest scheme in the small cap category based on assets managed, failed to offer over 25% in a five year period.
The small cap funds offered an average return of around 17.48% in a five year period. Small cap schemes are benchmarked against Nifty Smallcap 100 – TRI, Nifty Smallcap 250 – TRI, and S&P BSE 250 Small Cap – TRI.
ETMutualFunds also compared the performance of these five small cap mutual funds with their respective benchmarks. These toppers have managed to beat their respective benchmarks in a five year period.
The other small cap schemes offered returns ranging from 8.63% – 18.08% in five years.
We considered all the small cap schemes that have been in the market for five years for the study. We considered regular and growth options. We considered daily rolling returns of small cap schemes for the analysis. Daily rolling returns were calculated from March 13, 2019 to March 13, 2024.
Note, this exercise is not a recommendation. This exercise was just to find small cap schemes that have offered more than 25% returns in a five year horizon.
One should not make investment or redemption decisions based on the above exercise. One should always consider goals, investment horizons, and risk appetite before making investment decisions.
Also Read | Power Grid, Infosys among top 10 holdings of Nippon India Mutual Fund
Small cap schemes are always considered risky. However, they also have the potential to deliver very high returns over a long period of time. The trouble is these schemes are also notorious for their very long bear phases. When the market gets into a lean phase small cap segments lose heavily as investors look for safer investment options. Small cap companies also have corporate governance issues.
This is why ETMutualFunds do not recommend small cap schemes to new and inexperienced investors. We always tell investors to gain experience and knowledge before investing in small cap schemes. We believe that only investors with a very high risk appetite and stomach for volatility should invest in small cap schemes. They also should have a long investment horizon of, say, seven to 10 years.
If you are looking for recommendations, see: Best small cap mutual funds to invest in March 2024
Way forward
Sebi in a letter asked mutual funds to frame a policy in order to protect interest of investors investing in mid cap and small cap schemes. The concern raised by Sebi regarding the froth building up in mid and small cap schemes. This concern had led the small cap index to fall more than 5% in a single-day.
“The stress test reveals that if there is a sudden shock, a whiplash of some investor pulling out, will you have trouble in selling your most appreciated smallcaps? Your position will be that what has gone up the most is what I would like to sell. But no, market conditions will not allow you to do that. So, the stress test shows that and like I said, we have been very prudent,” Sunil Subramaniam, MD & CEO, Sundaram Mutual told ET Now.
“Over the last couple of days, stocks have been knocked down 10% minimum and more, so a lot of that fluff is definitely out. But even before that, our thought was if the earnings delta of small over mid and mid over large sustained deeper into the future, even before correction valuation for a long-term investor, this space would have made more money than the larger cap part of the market as long as the quality of business was good,” Prateek Agrawal, ED, Motilal Oswal AMC told ET Now.
