With valuations of small caps turning attractive, most fund houses have reopened their small-cap funds for lumpsum investments.
SBI Mutual Fund, DSP Mutual Fund and Nippon India have opened their small cap funds for making lump-sum investments.
In the past three months, BSE Small Cap Index has fallen almost 33 percent, hitting a six-year low.
In comparison, BSE Sensex has fallen 34 percent and BSE Midcap Index plunged 33 percent.
Fund managers said that given the current valuations and anticipated growth rebound, small caps can potentially outperform over the next 3 years.
"We feel there's a lot of opportunity in small cap space. Risk-reward is turning favourable for small caps. Historically sharp corrections create a platform for a strong rebound in the long run," said Samir Rachh, Fund Manager, Nippon Small Cap Fund.
He also said that the current market phase is very similar to 2013 wherein significant correction in small cap stocks over the past 18 months or so was seen.
"Hence, given the current valuation and anticipated growth rebound we expect the small caps to potentially outperform over the next 3 years or so," Rachh added.
Concurring with Rachh, R.Srinivasan, Head-Equity, SBI Mutual Fund said: "We believe the current situation is scary and evolving; and have no particular insights on how things will pan out. That said, from a bottom-up perspective, we do think there are businesses that have sustainable models and these are trading at attractive valuations. That’s the reason to open the fund, for a restricted amount."
In the last two years most fund houses had stopped subscriptions in their small caps after they hit the capacity envisaged in the offer document.
SEBI has no limits on quantity of money to be mobilised in each scheme.
MFs can decide in offer documents of closed funds , and in special circumstances , open funds also, at what quantity of subscription they want to halt for time being.
The reason for temporary halting subscription arises when fund managers found that they may not have additional quality scrips to invest in.
In practice , most equity small cap funds have been closed ended with a certain corpus, which a few are now opening for fresh subscription.
SBI has set a limit for lumpsum investments. Fresh subscriptions through lumpsum investments, including additional investments/Switch in, are being accepted till the receipt of net inflows in the scheme up to Rs 1000 crore.
On account of liquidity and free float issues, small cap stocks tend to be volatile especially in the short-to-medium-term, fund managers said.
Investors who link volatility to risk should be wary of it.
Small cap businesses, generally, also tend to be more risky in terms of their standard deviation of earnings. This likely impacts the probability of success in small cap investing.
Small cap funds are for seasoned investors who already have diversified equity funds and large cap and blue chip funds in their portfolio.
The benefit of diversification across all capitalisations is achieved by investing a part of overall portfolio in small cap funds.