Best Small Cap Mutual Funds to Invest in 2020

Small Cap mutual funds always invokes mixed reactions in investors. These funds promise higher returns compared to other categories; while also being high on the risk quotient. Investors are wary of the high risk associated with these funds and avoid it altogether.

Best Small cap Mutual funds

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Today we will analyze six small cap mutual funds on various risk-return parameters. We have considered 3 return periods, returns (CAGR) in the last one year, returns over past 3 years and returns over past 5 years. On the risk parameters, the funds are analyzed on metrics such as Standard Deviation, Beta, Sharpe Ratio and Sortino. Historical returns show CAGR (Compounded Annual Growth Rate) over specified periods, while Alpha measures the excess return compared to benchmark return.

The table below shows these metrics for 5 funds that we have shortlisted.


Note that the funds are not listed in any hierarchical order. Let us analyze the funds on different parameters-

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Of the 5 funds selected Axis Smallcap, SBI Smallcap and Nippon India Smallcap Fund have the given a return of more than 5% over the last 5 years. Over the last 3 years, however, only Axis Small cap and SBI Small cap have managed positive returns, while all the other funds have given negative returns. If we consider returns over the last one year all funds have given negative returns. This is largely attributable to sharp market fall in March. Even then only Axis Small cap Fund has managed single digit negative returns. This is in sync with its reported Downside capture ratio of 0.62. All other funds seem to have fallen very sharply, some capturing as much as the broader market fall.

Also read: 5 points to remember before investing in Small-Cap funds


Risk of a fund is measured by Standard Deviation, Sharpe, Sortino and Beta.

Standard Deviation

Standard Deviation stands for Total Risk of the fund. While for all the funds, Standard deviation is quite high in a range of 23- 26, Axis Small cap Fund has the lowest of reported Standard Deviation of 23.10. For all other funds Standard Deviation is upwards of 24.5%.


Higher the Beta, higher is the riskiness of the fund as compared to market. On this parameter too, Axis Small cap takes the lead with beta of 0.8, implying that the fund is 20% less risky as compared to markets. Most other funds with beta more than .85, while relatively less risky than the market, are riskierthan Axis Small cap Fund.

Sharpe Ratio

Metric of Risk Adjusted Return, Sharpe Ratio shows the return earned per unit of risk assumed. Here too again, Axis Small cap Fund and SBI Small cap Fund lead with positive Sharpe ratios of .13 and .1 respectively. Viewed on a standalone basis, these Sharpe ratios are very low. However, in a scenario where market has recently suffered a big downfall and when most other small cap funds have negative Sharpe Ratios, low but positive Risk Adjusted Ratio ofAxis Small cap Fund and SBI Small cap Fund stand in sharp contrast.The other three funds in our analysis have all reported negative Sharpe ratios indicating that the returns given by them are lower than even the risk free rate.


On this parameter, too, while all the funds reported negative Sortino Ratios, Axis Smallcap Fund and SBI Small cap Fund lead with positive Sortinos of -0.02 and -0.04 respectively. All other funds reported negative Sortinos of -0.3 and more.

Capture Ratio

Downside capture ratio measures how much of the downside of the market the fund has absorbed, whereas Upside capture ratio measures how much of the upside of the market the fund has absorbed. A fund that gives returns better than its benchmark or market returns will be preferred whereas, a fund that falls 10% when market falls 15% is preferred for investment over a fund that falls 18 or 20% for same level of market fall. Ideally we would like to choose a fund that given more returns than the market and which has fallen lesser than the market in periods of downturn. This will be captured by the Capture Ratio which is a ratio of Upside capture Ratio to Downside capture Ratio.  Higher Capture ratio is preferred, as it indicates better returns given by the fund as compared to its benchmark while also managing downside well.On this parameter, again Axis Small cap Fund and SBI Small cap Fundalong with L&T Emerging Business Fund lead the show with a Capture Ratio of more than 1.4. All other funds have a Capture Ratio of 1.02 to 1.16.

Also read: Categorization & Rationalization of Mutual Fund Schemes by SEBI

Expense Ratios

Last but not the least, this is one of the important deciding criterion for selecting funds. Lesser expense ratios will translate into higher returns. While five of the six funds considered have expense ratios of more 0.88% and more, Axis Small cap leads the show with expenses ratio of 0.31% as on May 31’2020.

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Our analysis shows that Axis Small cap fund is a clear winner with relatively lesser risk, well protected downside and has managed to give positive risk adjusted return even in recent market downfall. Its expense ratio is also one of lowest among small cap mutual funds. However, one must bear in mind that small cap mutual funds by nature are very risky and extremely volatile too. In our opinion, they are for meant for savvy investors who understand the nuances of how equity markets work. Even if you must invest, you need to invest with a horizon of more than 5 years. SBI Small cap Fund can also be considered on the same metrics as the next best alternative.

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