Small can be big, but tread cautiously

At a seminar where I was a speaker some years ago, I remember meeting a retired Professor who wished to know if she should invest one-third of her retirement corpus in small-cap funds as they seemed to be yielding maximum returns at that point in time. As a policy, I respond to all queries on public forums at only a macro level to minimise any scope of misinterpretation that could lead to an unwanted loss for any investor.

Hence, I told her that returns must be reviewed over longer time frames and not just the last 12 months and also suggested that in terms of Life-Cycle investing, Small Cap funds might be more suited for her daughter who had accompanied her.

The Securities and Exchange Board of India (SEBI) defines small-cap companies as those which are ranked below the 250th rank in terms of market capitalisation. In the Mutual Fund space, Small-Cap Funds, as the name suggests, are those that invest a major portion of their investible corpus into equity or equity-related instruments of small-cap companies. As per SEBI’s definition, small-cap schemes need to invest at least 65 per cent of their total assets in small-cap companies.

It is important for investors to be cognizant of the fact that small-cap funds carry a higher level of risk than many of the SEBI defined categories. Even the slightest volatility in the market can have a huge impact on the share prices of small-cap companies. Hence, one must tread with caution. Let us now turn the spotlight on some of the small cap funds with relatively smaller AUMs.

Canara Robeco Small Cap Fund was launched in February 2019 and has an AUM of Rs. 4,063 crores.  Its 3-year CAGR has been around 37.5% while its one-year return has been around 7.7%. This fund invests largely in stocks from the services, financial and capital goods segment.

Quant Small Cap Fund was launched in November 1996 and has an assets under management (AUM) of `2,355 crore. The three-year CAGR for this fund has been around 49.5% while its one-year return has been around 2.9%. This fund invests in stocks across sectors like consumer staples, materials and services.
Sundaram Small Cap Fund has an AUM of Rs 2,080 crore and was launched in February 2005. Its three year CAGR is around 26.9% while its one year return is around minus 1.6%. This fund has higher allocations in stocks across sectors such as financial, capital goods and services.

Tata Small Cap Fund has an AUM of Rs 2,664 crore and was launched in November 2018. Its three-year CAGR is around 30.7% while its one-year return is around 6.4%. This fund has higher allocations in stocks across sectors such as services, financial and capital goods.

Clearly, there are returns to be made in small-cap funds, but one must be discerning in its selection and even more importantly, an assessment of the suitability of a small cap fund based on life cycle stage must be undertaken before investing.

Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com

At a seminar where I was a speaker some years ago, I remember meeting a retired Professor who wished to know if she should invest one-third of her retirement corpus in small-cap funds as they seemed to be yielding maximum returns at that point in time. As a policy, I respond to all queries on public forums at only a macro level to minimise any scope of misinterpretation that could lead to an unwanted loss for any investor. Hence, I told her that returns must be reviewed over longer time frames and not just the last 12 months and also suggested that in terms of Life-Cycle investing, Small Cap funds might be more suited for her daughter who had accompanied her. The Securities and Exchange Board of India (SEBI) defines small-cap companies as those which are ranked below the 250th rank in terms of market capitalisation. In the Mutual Fund space, Small-Cap Funds, as the name suggests, are those that invest a major portion of their investible corpus into equity or equity-related instruments of small-cap companies. As per SEBI’s definition, small-cap schemes need to invest at least 65 per cent of their total assets in small-cap companies. It is important for investors to be cognizant of the fact that small-cap funds carry a higher level of risk than many of the SEBI defined categories. Even the slightest volatility in the market can have a huge impact on the share prices of small-cap companies. Hence, one must tread with caution. Let us now turn the spotlight on some of the small cap funds with relatively smaller AUMs. Canara Robeco Small Cap Fund was launched in February 2019 and has an AUM of Rs. 4,063 crores.  Its 3-year CAGR has been around 37.5% while its one-year return has been around 7.7%. This fund invests largely in stocks from the services, financial and capital goods segment. Quant Small Cap Fund was launched in November 1996 and has an assets under management (AUM) of `2,355 crore. The three-year CAGR for this fund has been around 49.5% while its one-year return has been around 2.9%. This fund invests in stocks across sectors like consumer staples, materials and services. Sundaram Small Cap Fund has an AUM of Rs 2,080 crore and was launched in February 2005. Its three year CAGR is around 26.9% while its one year return is around minus 1.6%. This fund has higher allocations in stocks across sectors such as financial, capital goods and services. Tata Small Cap Fund has an AUM of Rs 2,664 crore and was launched in November 2018. Its three-year CAGR is around 30.7% while its one-year return is around 6.4%. This fund has higher allocations in stocks across sectors such as services, financial and capital goods. Clearly, there are returns to be made in small-cap funds, but one must be discerning in its selection and even more importantly, an assessment of the suitability of a small cap fund based on life cycle stage must be undertaken before investing. Ashok Kumar Head of LKW-India. He can be reached at ceolotus@hotmail.com