Small Cap Mutual Funds2019-09-06T09:25:17+00:00

Small Cap Mutual Funds

Small Cap Mutual Funds

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What are Small Cap Mutual Funds?


Small Cap Mutual Funds are essentially a type of equity mutual fund for financial products of small-cap companies. Small-cap generally signifies companies with small market capitalization or market cap.

Market Capitalization = Number of Outstanding Shares x Stock Price Per Share.

As per the circular issued by the Securities Exchange Board of India (SEBI), In order to be classified as a small-cap company the following criteria will have to be met.

  • Rank 251 and below in terms of total market capitalization
  • Holding at-least 65% of assets in small cap equity and equity instruments
  • Market Cap between Rs. 10 Crore and Rs. 100 crore

Essentially, small-cap funds are a high-risk, high-reward type of mutual funds with high chances of volatility. The best of the small-cap mutual funds are largely invested in the stocks of small companies which show potential for incredible growth in the near future. Certain stocks have also shown double or triple growth in a span of a few years this, however, is another indicator of the high volatility of small-cap mutual funds.

Should I Invest in Small-Cap Mutual Funds?


Small-Cap Mutual funds are famous for their high-return potential. Many times, small-cap funds have been known to consistently outperform their benchmark indices in times of market highs. However, as the high as the performance shoots up during times of market highs it might slump pretty bad in times of market fall. The Net Asset Value or NAV of the fund might vary a lot in the small-cap mutual funds.

Basically, if you are not averse to taking a risk or rather you are an avid risk-seeker and you are looking for high returns from high-risk type ventures, you are more than welcome to try investing in the small-cap mutual fund. These funds can very much help in your portfolio diversification. Consider investing small amounts in these kinds of funds and they could potentially contribute towards long-term wealth accumulation. The basic essence is that if you are ok with taking high to moderate risks you should try to invest a small part of your fortunes in small-cap funds.

Things to Know before investing in Small-Cap Funds


Investor self-assessment is one of the pivotal things that you need to do before you invest in these funds. You need to take into consideration the various factors and components that affect the performance of these funds. Weign the factors like your age, risk tolerance, investment objectives and the horizon (time) period. In addition to this, here are some factors that should affect your decision to invest or not.

Construction of Portfolio

Small Cap Mutual Funds should be chosen in a way that appropriately balances your portfolio. You should aim to invest in funds targeting across various sectors of the economy. It is generally good practice to steer clear of funds that are concentrated in a very limited amount of stocks. The frequency of the trading activity ongoing in the fund. Point to be noted for these funds is that the most successful funds tend to have a portfolio turnover ratios less than 30%.

Past Performance of the Small Cap Fund

The very recent performance of the fund is generally not a very reliant metric for the performance of the fund, no matter how good the returns might be. In order to truly assess the performance of the fund, you need to witness the performance of the fund over rough and bullish times of market lows. In an ideal case, you can look over the performance of the fund over the past 5 years and compare with peer funds. You can go ahead with investment in a particular fund if you feel the performance of the fund is consistent and stable across all market conditions and cycles.

Check P/E Ratio

The P/E Ratio or the Price-Earning Ratios will give u a general idea about the fundamental growth potential of the fund. It will also ban indicator of the amount your chosen fund will overpay for growth. The best small cap mutual funds having a P/E ration above 30x are considered to be expensive.

Fund House Quality

Ample research must be carried out in order to pick a fund house that has a great record of beating benchmark performances in all kinds of market cycles. Ideal fund houses usually have a great investment procedure in place in addition to efficient risk management strategies. These fund houses have an expert team for research and offer good coverage to the investors.

Stay Informed about the Options

Small Cap mutual funds are essentially a game of choosing between risk and reward. It is advisable to invest in a way which allows the small-cap fund the flexibility to hold high-cash or even in help in investing in mid-cap and large-cap stock. This technique might lessen your returns slightly but, you will get to hold more cash for yourself and that depends on your willingness to keep your options open.

Experienced Fund Manager

The advice of an experienced and expert fund manager can never hurt while choosing a small-cap mutual fund as assessing these funds requires qualitative analysis. You should preferably take advice from a fund manager who has an excellent performance record themselves.

Risk-Adjusted Returns

Small Cap funds are very risk-prone that has been well and truly established however, some funds can handle risk better than others. Within small-cap funds, you should try investing in schemes which have a better chance of furnishing better returns with low volatility.

Which Fund should I Invest in?


When you’re looking to invest in small-cap mutual funds, there are a number of criteria and financial ratios you should look at in order to arrive at the decision to choose the best fund for you. Here are some of the factors you need to weigh in before choosing a particular fund to invest in.

  • Standard Deviation

  • Standard deviation is essentially the measure of a set of data from and near the mean value. In financial terms, however, this means the annual rate of return on investments made and it is also an indicator of the volatility of the investments made. Stocks with high standard deviation have higher prices and are more volatile with respect to the market fluctuations which is in contrast to the funds with low standard deviation.

  • Sharpe Ratio

  • It basically measures the risk-adjusted returns of a particular portfolio. Higher Sharpe Ratio indicates a superior portfolio comparative to its peers.

    Sharpe Ratio = (Average Fund Return – Risk-Free Rate )/ Standard Deviation of the fund

  • R-Square

  • Essentially, the r-square is a measure of the percentage of funds in line with the benchmark returns.R-square is rated from between 0 to 1 as points or it is also measured in percentages. An R-square of 1 or 100% is indicative of the movement of the securities’ movements can be attributed to the movements in the benchmark indices. High R-square indicates a more useful beta figure.

  • Beta

  • This index basically tells us about the funds’ sensitivity in accordance with the co-related movements of a benchmark. If a fund indicates a beta of 1.0 it means the fund is as volatile as the benchmark unit. In a similar fashion, if a fund has a beta of 0.70 it means that the fund 30% less volatile than benchmark indices. Similarly, If the benchmark is 1.30 it shows that the fund is 30% more volatile.

  • Alpha

  • Alpha indicates the asset manager’s ability to register profits when the benchmark is also making profits. The way alpha is measured is as an index which can be less than, equal to, or greater than 1.0. Higher the number, higher the ability of the fund manager to make profits with movements in the benchmark.

Best Small-Cap Funds in India


Fund Name 3- Year Returns 5- year Returns
SBI Small Cap Fund16.19%27.91%
Reliance Small Cap Fund16.2%25%
HDFC Small Cap Fund19.78%19.33%
Aditya Birla Sun Life Small Cap Fund10.47%17.94%
Kotak Small Cap Fund10.8%19.11%
DSP Mid Cap Fund15.28%20.51%