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As large caps turn expensive, time to invest in small cap funds: Experts

There are many reasons why mutual fund distributors are recommending small cap schemes to investors.

, ET Bureau|
Updated: Dec 05, 2019, 09.44 AM IST
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Among small-cap schemes, SBI Smallcap, Axis Smallcap and L&T Emerging Businesses are top three performers by returns.
Mutual fund distributors are recommending small cap schemes to retail and high net worth individuals (HNIs) as certain fundamental factors warrant enhancing exposure to these schemes.

Rupesh Bhansali, head-mutual funds, GEPL Capital said: “Today, large caps are trading at very high valuations. Their high valuations, to a large extent, capture the potential earnings at least in the near term. Investors need to recalibrate their portfolios now. For those who want to gain in the long term must add small-cap schemes to their portfolio as a diversification strategy.”

There are three key reasons distributors have been recommending small cap schemes: First, the valuation gap between large-sized companies and small caps is higher than the historical average. In the past five years, large caps had been trading at a 5 per cent premium to small-sized companies. At present, this valuation gap has expanded. Today, large caps are trading at 34 per cent premium to small-sized companies.

Second, after the reclassification of the scope of investments of an index, unlike in the past, the small cap universe has seen the entry of quality names, which offers reasonable scope for fund managers to spot interesting and profitable ideas. Currently, the small cap universe is between top 250 and 500 companies by market capitalisation.

Third, historically, it has been observed that after large caps turn expensive, the next leg of rally follows in mid caps and then percolates into small caps. Considering these factors, distributors are recommending small cap schemes with at least a five-year view.

Smallcap snip 1

Among small cap schemes, SBI Small Cap, Axis Small Cap and L&T Emerging Businesses are top three performers by returns.

Distributors recommend that retail investors should invest in small cap schemes through the systematic investment plan (SIP) route. For HNIs, they recommend investing in a staggered manner.
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