Do Small Cap Mutual Funds Can Really Make You Rich?

Many investors, especially the new ones, bet on small-cap mutual fund schemes in order to maximize their returns. With their eyes set solely on returns, most of them are not even mindful of the risk involved in investing in these schemes. The big question that arises is: Do small-cap mutual fund schemes really offer stupendous returns as many investors imagine?

So, let's answer this question by having the deep study on what the small-cap funds actually are and how do they work?

Small Cap Mutual Funds

According to the norms of SEBI, small-cap funds are described as those funds which make the majority of their investment in small companies. The companies, on the basis of their market capitalization, which are ranked beyond 250 are categorized as small-cap companies. They can be called as start-ups or the emerging companies which have the potential for growth and can be evaluated on the basis of the NAV of the small-cap mutual fund. The stocks of these companies are volatile and considered as more riskier than large-cap funds but as the funds are managed by the professionals, the small-cap funds have the ability to deliver outstanding returns as the experts know how the market will work and when to invest. They play safely on behalf of an investor.

Top Performing Small-Cap Funds

Reliance Small Cap Fund- One of the most popular fund in the small-cap category, is ranked 1st by CRISIL under the category of small & mid-cap funds. It has delivered 22.2% return in past 1 year, 31.3% return in the past 2 years, and 35.8% return in 5 years. The person responsible for this outstanding performance is the fund manager Mr. Samir Rachh who has over 25 years of experience in the non-banking financial sector. Majority of sector allocation is sloping towards engineering, FMCG, chemicals, and construction sector.

SBI Small Cap Fund- This small-cap fund has also delivered handsome returns in current years. The fund has outperformed its benchmark, S&P BSE Small Cap TRI everytime by generating 32.6% return in 1 year and 31.4% return in 2 years. The fund is managed by Mr. R Srinivasan who has pursued M.com and MFM. Prior to joining SBI in November 2013, he has working experience with PNB AMC and many other prominent financial firms. He has made 70-80% investment in equity instruments of small-cap companies due to which the fund generates heavy returns at the expense of high-risk factor.

Aditya Birla Sun Life Small Cap Fund- It is yet another designated option for long-term wealth creation as it has provided 25.9% annualized return in 2 years and 27% annualized return in 5 years. The fund manager is Mr. Jayesh Gandhi who is a B.Com, CFA, and has a Master’s degree in International Management from Thunderbird, USA. He also has 15 years of experience. He targets equity instruments of small-cap and mid-cap companies of finance, construction and engineering sectors.

L&T Emerging Businesses Fund- It is an open-ended equity scheme predominantly investing in small-cap companies which is managed by S.N. Lahiri and Karan Desai (for investments in Foreign Securities). The fund aims to generate long-term capital appreciation from a diversified portfolio of equity and equity-related securities. It was launched on 13 may, 2014. S&P BSE Smallcap TRI index is its benchmark index. The performance of the fund was very appreciable as in 2015, the fund has returned 12.32%, in 2016 it was 10.21% and in 2017, the highest returns were recorded, i.e., 66.5% with continuously beating its benchmark.

Small-cap funds have the highest growth potential as the companies in which the small-cap funds are making investment are young and have the potential to take the pace of growth and expansion. Investors who are in search of small-cap space and don’t have the time to make research but have the stomach to digest high risk can opt for investing in small-cap funds.

Dishika is well-versed with the ups and downs of the financial market and has published articles on mutual fund and SIP. She is associated with MySIPonline.com, which is an AMFI registered mutual fund company.