Do you have small-cap funds in your portfolio? Now's the time to get some

In terms of market capitalisation, the composition of the BSE SmallCap index is distinct, since the highest contribution comes from healthcare.

With Sensex appreciating almost 56% and Nifty growing by 59% over the past year, markets have definitely been touching new heights in recent times. However, one segment that has been delivering stellar performances over the last 12 months is the small-cap funds. Notably, small-cap companies have a market capitalisation of less than Rs 5,000 crore. 

Consider this. S&P BSE Smallcap index (112.82%) has outperformed Sensex (93.49%) over a five-year period. Not only this, small-cap indices have also outshone the benchmark index over a one-year period as well. While Sensex yielded 66.67%, BSE small-cap index’s returns were almost double at 122%!

Even on the international scene, the MSCI India domestic small-cap index recorded a growth of almost 117%, followed closely by the MSCI Africa small-cap index, which gained 109.57%.

Continuing to shine

More and more investors are warming up to the idea of investing in small-cap funds, which are traditionally seen as a high-risk, high-return proposition. As per the Association of Mutual Funds of India’s (AMFI) recent data, small-cap funds also saw a significant increase in total funds amassed, from Rs 1,711 crore in April 2021 to Rs 2,316 crore in May 2021. 

This was bolstered by growing inflows in the small-cap segment, which grew from Rs 183 crore in April to a staggering Rs 1,080 crore in May 2021. The small-cap index also offers more scope in terms of investments, also stepping away from the traditional composition of Sensex, which is dominated by the banking and finance sector, followed by technology.

In terms of market capitalisation, the composition of the BSE SmallCap index is distinct, since the highest contribution comes from healthcare, which is preceded by the financial sector and chemicals. 

Small-Cap funds are a barometer of a recovering economy since these stocks tend to gain more traction in a high liquidity situation in the market. Experts recommend minimal portfolio allocation of around 5-10%  to risk-averse investors since they demand long-term investment and a strong risk appetite. For high-risk and aggressive investors, small-cap funds can constitute up to 40% of their total portfolio. 

As per a Delhi-based financial planner and mutual fund analyst who wishes to remain anonymous, one of the major flipsides of small-cap funds is the lack of transparency in the management structure of small-cap companies. 

“Small-cap funds are not everyone’s cup of tea. There is a great potential of appreciation in their prices, which comes with significant risk. So, one should analyse their risk profiles and invest accordingly in these funds”, he explained.