Top 8 Small Cap Mutual Funds to Invest in 2024 : Investing in small-cap mutual funds offers an opportunity to participate in the growth potential of promising companies. Nevertheless, investors must acknowledge the accompanying higher levels of risk. Large investors frequently underestimate small-cap companies, presenting an opportunity to discover undervalued gems that boast substantial growth potential.
Historically, small-cap funds have demonstrated superior performance compared to other equity categories over extended periods, presenting the prospect of generating alpha, i.e., excess returns beyond the benchmark. Nonetheless, these funds generally allocate investments to a smaller pool of companies, elevating the concentration risk and the possibility of losses if a subset of companies underperforms.
Additionally, small-cap stocks exhibit heightened sensitivity to market fluctuations, resulting in more pronounced price volatility, both on the upside and downside, compared to their large-cap counterparts. This phenomenon explains the extreme highs and lows observed in funds that invest in these stocks.
To identify small-cap funds that have maintained consistent performance over the last decade or more, it’s essential to first grasp the nature of these funds and recognize their potential contribution to an investment portfolio.
These funds have the potential to recognize and invest in undervalued companies, paving the way for substantial growth when their full potential is realized. The adaptability in investing across small-cap stocks and other options empowers fund managers to customize the fund’s risk-return profile in alignment with their specific investment objectives.
Evaluating the returns of small-cap funds over the last decade is a method for assessing their performance, although seasoned investors consider various factors such as the portfolio turnover ratio, expense ratio, and fund management, among others, to determine whether the fund would be a beneficial addition to their investment portfolios.
Name of the fund house | Name of the fund | 10-year returns (in %) |
Nippon India Mutual Fund | Nippon India Small Cap Fund | 29.24 |
SBI Mutual Fund | SBI Small Cap Fund | 28.34 |
DSP Mutual Fund | DSP Small Cap Fund | 25.95 |
Axis Mutual Fund | Axis Small Cap Fund | 25.15 |
Kotak Mahindra Mutual Fund | Kotak Small Cap Fund | 24.40 |
HDFC Mutual Fund | HDFC Small Cap Fund | 22.54 |
Sundaram Mutual Fund | Sundaram Small Cap Fund | 22.52 |
Quant Mutual Fund | Quant Small Cap Fund | 19.17 |
| Source: AMFI (As of December 06, 2023) | ||
Minimized volatility: The fund achieves reduced fluctuations by diversifying across numerous small-cap companies, thereby mitigating the impact of individual stocks’ ups and downs. Consequently, the overall value of your investment is less susceptible to abrupt declines resulting from the underperformance of one or two companies.
Expert oversight: Fund managers, possessing specialized skills in researching and analysing small-cap companies, excel in identifying promising entities with robust growth potential and steering clear of those exhibiting warning signs. This diminishes the likelihood of you selecting an underperforming investment.
Ease of trading: Due to their low trading volume, buying and selling small-cap stocks can be challenging. Nevertheless, mutual fund units usually offer high liquidity, enabling you to readily redeem them as necessary.
Reduced expense ratios: Although mutual funds involve fees, they are typically lower compared to the commissions incurred when trading individual small-cap stocks.
Nevertheless, allocating funds to small-cap funds doesn’t completely insulate investors from the market risks associated with investing in individual small-cap stocks. It’s crucial to acknowledge that small-cap mutual funds still entail certain risks.
Small-cap funds are most appropriate for investors with a high tolerance for risk and a long-term investment horizon. Those considering these funds should be ready to withstand short-term volatility in pursuit of the potential for greater long-term returns. While small-cap funds can be a valuable asset for investors seeking higher returns at the expense of increased risk, it is crucial to thoughtfully assess your risk tolerance and investment objectives before committing to these funds.
In general, small-cap mutual funds present a more well-rounded approach to investing in small-cap companies compared to independent efforts. They can assist in alleviating certain risks while retaining the potential for increased returns. Nonetheless, it is essential to thoroughly research the particular fund, comprehend its fees, and contemplate your overall investment strategy before committing.
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