Should retail investors put money in smallcap funds?
Smallcap funds are those which invest in shares of companies which have smaller market capitalisation.
Small-cap equity funds are those which invest in shares of companies which have smaller market capitalisation and invest in the 251st company onwards in terms of full market capitalisation. In such a fund, the fund manager needs to have a minimum exposure of 65% to such companies. The remaining can be in mid, large or small-cap companies depending on the view of the fund manager.
Increased investor interest in the small cap space has led to high inflows into this category of funds over the past three years. A number of fund houses have launched products in the space in the past few months with more in the pipeline.
Why are small-cap funds getting popular among investors?
There is a wide universe of stocks to pick and choose from in the small-cap space for fund managers, post Sebi scheme categorisation. While only 100 stocks available the large-cap space, 150 are available in mid-caps and over 2,000 stocks are there in the small-cap basket. As many as 30-40 analysts cover large-cap stocks, but many stocks in the BSE Small cap index are not covered by a single analyst, leaving a lot of scope for fund managers to generate alpha. Since the small-cap universe is large, fund managers may incrementally look forward to investing in this space. Small caps are relatively under researched and there is tremendous scope for fund managers to generate alpha.
Who should invest in small-cap equity fund?
Small-cap funds carry higher market risk when compared to large or even mid-cap funds. Investors with the ability to digest higher risk and a longer time frame of 7-10 years could look at investing in this category. Wealth managers suggest investors must have a small composition allocated in his/her portfolio towards small-cap funds. One of the best ways of investing in this segment of the market to reduce risk could be using systematic investment plan (SIP) as that would stagger your investments over a period of time and help you average your investments. Small-cap equity funds can be ideal for investors who may have long-term goals like planning for your children’s education and saving for your retirement. Historically, these funds have delivered higher returns as compared to the benchmark.
Why do some small-cap funds not allow lump sum investments?
All small cap funds do not permit lumpsum investment.
Depending on the fund manager view on the market and the assets he can manage, once the fund reaches a particular size, the fund manager may close it temporarily for lumpsum investments and allow only SIPs.