In this article, we will discuss Small cap mutual funds and the Top 3 Smallcap funds which most likely outperform their peers in 2023.
Smallcap mutual funds are high-risk – high return equity mutual funds that invest at least 65% of the corpus in companies that rank below 250 in terms of market capitalization which have the potential to offer better returns in the future if they outgrow the market. Investment in Small Cap mutual funds is associated with higher risk levels compared to mid-cap and large-cap funds as they invest in lesser-known and under-researched companies.
Smallcap mutual funds are taxed like any other equity fund. In the short term (within one year), the gains are subject to STCG tax of 15%. In the long term (after one year), the gains exceeding INR 1 lakh are subject to LTCG tax of 10%.
First, let’s look at the advantages of investing in Smallcap funds:
- Ability to outperform large-cap and mid-cap funds since small-cap companies have a higher potential to grow.
- They offer diversification which is very important to cushion any economic shocks since smallcap companies are very sensitive to market forces.
- Low upfront investment requirement.
- Top funds are highly liquid.
- Ideal for very high-risk appetite investors who can patiently invest and those willing to absorb short-term volatility
Now, the cons:
- They are very vulnerable to business cycles and hence are more volatile than mid and large-cap funds.
- Smallcap funds are sensitive to market conditions hence during an economic crisis larger, well-established companies tend to do better than Small cap companies.
Factors to consider:
There are several factors to consider while selecting Smallcap mutual funds but today will mention a few major ones, they are;
- Standard deviation
- Beta.
- Sharpe Ratio.
- Jensen’s Alpha.
- Treynor’s Ratio.
- Expense Ratio.
Also read: Here is how to get out of the rat race and achieve your financial goals
Top 3 Smallcap funds:
- Axis Small Cap Fund:
It is an open-ended equity scheme predominantly investing in small-cap stocks and the investment objective is to generate long-term capital appreciation from a diversified portfolio of predominantly equity & equity-related instruments of small-cap companies. These companies are either at their nascent or developing stage and are under-researched. Its benchmark is Nifty Smallcap 250 TRI.
The approach for the Axis Small Cap Fund is two-fold – qualitative and quantitative. Quantitative factors include looking at high profitability, low debt to equity, and earnings consistency along with stable cash flow and strong return metrics; whereas qualitative factors include transparency of operations, strong internal controls, and sustainable long-term business models.
Fund manager:
- Anupam Tiwari, since 6 Oct-2016.
This fund has an AUM of Rs. 11,390 Cr and has given a 23.56% CAGR return since its Inception. The minimum investment amount for this fund is Rs. 500 and the additional investment amount is Rs. 100+.
There is no entry load for the fund but there is some exit load:
- For redemption / switch out of up to 10% of the initial investment amount (limit) purchased or switched in within 1 year from the date of allotment: NIL.
- If units redeemed or switched out are in excess of the limit within 1 year from the date of allotment: 1%.
- If units are redeemed or switched out on or after 1 year from the date of allotment: NIL
This scheme is suitable for investors looking for:
- Long-term capital growth (at least 5 years and above).
- Investors who are willing to absorb short-term volatility.
Returns:
Some Important Ratios:
| Standard Deviation | 18.62 |
| Beta | 0.76 |
| Sharpe Ratio | 0.97 |
| Jensen‘s Alpha | 3.32 |
| Treynor’s Ratio | 0.22 |
| Expense Ratio | 0.51% |
- Canara Robeco Small Cap Fund:
The investment objective of the scheme is to generate capital appreciation by investing predominantly in Small Cap stocks (>65%). However, there can be no assurance that the investment objective of the scheme will be realized. Its benchmark is Nifty Smallcap 250 TRI.
Fund manager:
- Ajay Khandelwal since 16-Dec-2021
- Shridatta Bhandwaldar since 01-Oct-2019
This fund has an AUM of Rs. 4,568 Cr and has given a 26.66% CAGR return since its Inception. The minimum investment amount for this fund is Rs. 5000 and the additional investment amount is Rs. 1000+.
There is no entry load for the fund but there is some exit load:
- If units redeemed or switched out are in excess of the limit within 1 year from the date of allotment: 1%.
- If units are redeemed or switched out on or after 1 year from the date of allotment: NIL
Returns:
Some Important Ratios:
| Standard Deviation | 20.6 |
| Beta | 0.87 |
| Sharpe Ratio | 1.33 |
| Jensen‘s Alpha | 10.53 |
| Treynor’s Ratio | 0.32 |
| Expense Ratio | 0.41% |
- Kotak Small Cap Fund:
It is an open-ended equity scheme predominantly investing in small-cap stocks and aims to generate capital appreciation from a diversified portfolio of equity & equity-related securities by investing predominantly in the small market capitalisation companies across sectors. The scheme aims to provide the benefit of potential growth offered by Small Cap stocks, which have the potential to become tomorrow’s large-cap. Its benchmark is Nifty Smallcap 250 TRI.
Fund manager:
- Pankaj Tibrewal since 01-Jan-2013.
This fund has an AUM of Rs. 8,498 Cr and has given a 19.47% CAGR return since its Inception. The minimum investment amount for this fund is Rs. 5000 and the additional investment amount is Rs. 1000+.
There is no entry load for the fund but there is some exit load:
- For redemption / switch out of up to 10% of the initial investment amount (limit) purchased or switched in within 1 year from the date of allotment: NIL.
- For redemption / switch out of up to 10% of the initial investment amount (limit) purchased or switched in within 1 year from the date of allotment: NIL.
- If units redeemed or switched out are in excess of the limit within 1 year from the date of allotment: 1%.
- If units are redeemed or switched out on or after 1 year from the date of allotment: NIL
Returns:
Some Important Ratios:
| Standard Deviation | 18.62 |
| Beta | 0.78 |
| Sharpe Ratio | 1 |
| Jensen’s Alpha | 5.9 |
| Treynor’s Ratio | 0.24 |
| Expense Ratio | 0.59% |
GetAvail expert advice to achieve your financial goals faster, book a Free and non-obligatory consultation from our expert advisers.
Conclusion:
Smallcap companies are attractive to invest in as they have very high growth potential and they give higher returns than large and Midcap companies when the market is in a bullish phase hence investing in Smallcap Mutual funds which invest mostly (>60%) on midcap companies could prove to be very profitable. However, investors must be cognizant of the risks associated with small-cap mutual funds since they are extremely volatile and are placed on the higher end of the risk-return spectrum. Hence Mid cap mutual funds are best suit investors that very high-risk appetite and are willing to invest for the medium to long-term horizon.
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any investment decision.
If you are looking for a SEBI registered Investment Adviser visit mymoneysage.in
Also read: Do you have your Retirement plan in place?