Small Cap Funds: A Star in the Making!
When the word "Small Cap" is mentioned in the investor community, pin drop silence is observed which shows the disillusionment that investors have towards this product. The aversion towards this category will be more evident in the present context when there is gloom, both at the domestic and global front. The prevailing negative sentiments have made stock market investing a nightmare for all those who have parted with their hard earned savings into this sector, fondly called the barometer of the economy.
However, at this juncture, I would like to differ from the general view and recommend risk taking investors not to follow the herd but rather they can consider taking a small exposure into the small cap funds.
As far as the mutual fund industry is concerned, currently, there are only three funds which are named as small cap funds which actually follow a strategy of maintaining more than 50% of their portfolio in this space. DSP BlackRock Micro Cap and HSBC Small Cap Fund were launched in June 2007 and March 2008 while Reliance came out with a similar fund only in 2010. A closer look at their corpus shows DSP BlackRock Micro Cap Fund and Reliance Small Cap Fund have a mere corpus of ~ INR 445 crore and INR 436 crore, respectively as at March 2012.
This highlights the fact that retail investors have lack of interest in this category, which has a lot of potential to generate additional return in their portfolio. The fund houses should put in extra effort to create more awareness about these funds during choppy markets. Both funds are being managed by experienced hands like Apoorva Shah and Sunil Singhania, with whom retail investors feel very confident to park their money. These fund managers can actually calm the investors during market downturns and advise them on the positives of investing into this category when markets are range bound.
Small Cap funds are known to deliver impressive performance when bulls rule the markets, but they get battered during a bearish regime. For instance in 2009, Sensex was one of the best performing markets vis-a-vis its peers. This was on account of the positive impact of the stimulus released by the Government and the election results, which led to confidence among investors and corporate India that a stable government at the centre will be able to bring in a lot of reforms. This saw the index posting a superb return of 81% while the BSE Small Cap Index actually delivered an impressive 126% during the same time horizon. This could be attributed to the fact that during market upturns small cap companies normally outperform their larger peers, since the latter would have already reached their peak in terms of the potential to grow in the future, while the former actually gets to unlock its growth potential as there is a long way for them to reach the maturity stage.
There are a lot of reasons why investors should not directly get into small cap stocks as some of them can be illiquid and concerns may arise about the way the company is being professionally managed. Moreover, these companies have limited media coverage and they are largely unknown among investors, which means the information in public domain will be very limited.
Hence in this scenario, investors who want to play the small cap game should go in through the mutual fund route as they are professionally managed by people who have the expertise to spot the hidden gems. We believe that with BSE Small Cap Index trading at 55% below its all time high, this is the right time to get into small cap funds. However, this category is recommended only to investors who are ready to take the extra risk to get the additional upside in their portfolio and also have the patience to wait to reap the benefits.
The author is a Research Head at Fundsupermart.com India. You can write back to her at firstname.lastname@example.org
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