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The Economic Times

Small cap mutual funds are down 30% in a month. Is it time to invest?

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By Rushabh Desai

Two small cap mutual fund schemes, SBI Small Cap Fund and DSP Small Cap Fund, has reopened for lumpsum investments yesterday. Others are likely to follow suit in the coming days. The small cap space has corrected around 30% in the last one month, making the category relatively attractive.Is it time for you to join the party?

First of all, you should understand that small caps are highly risky and volatile. One will need a lot of time and patience (at least six to seven years) to earn the alpha returns in this category. Many say “time in the markets is more important than timing it if you have a long-term horizon.” I don’t fully agree with this statement, especially when it comes to lumpsum investors in the mid & small cap segments. There have been many years at a stretch where particularly the small caps have either delivered negative / zero or negligible returns. That is why I believe lumpsum investors should buy small caps strictly in the correction periods to get the alpha one deserves from this category.

Since 2018 the mid and small cap segments have been correcting quite a lot. We did see a good amount of recovery in the mid cap space, but due to the global spread of COVID-19 (coronavirus) the entire equity segment have been brutally massacred, making certain pockets, especially the small caps super lucrative for high risk lumpsum and SIP investors from the valuation/price point of view.

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Please keep in mind that due to the global lock down of many economies, the recovery in the small cap space shall be slow and many companies may go bust. We still don’t have a solution to the COVID-19 pandemic. Markets are going to be very volatile and small caps will be it hard by in a market mayhem.

Investors should not expect a sharp rally in the small cap space from a short-term perspective. When the recovery starts, the large cap schemes shall recover first. Small caps will recover much later. If you have the patience and invest with quality managers and management, it helps you to get the returns you deserve from small cap schemes.

Should any investor can get into the small cap segment? No, only those with a high risk-taking ability and a minimum six to seven years’ time-frame should invest in the space.

From the valuations perspective AMCs may have taken a very good call of opening their small cap schemes for lumpsum investments. No one can predict the very bottom, anyone having a high-risk appetite should start staggering (2 – 3 months) their lumpsum investments in quality small cap funds. COVID-19 is definitely temporary but once that is behind us some serious money will be made in the recovery process from these levels. Before investing know your goals, risk, asset allocation & time horizon.

(Rushabh Desai is a Mutual Fund Distributor, based in Mumbai)
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