Best Small-Cap Mutual Funds to Consider for Investment in September 2024
Small-cap mutual funds, which invest in stocks of smaller companies, have been creating ripples with their surprising returns. These funds returned more than 40.44% last year and saw renewed interest from investors in July 2024, with Rs.2,109.20 crore inflow.
While many experts talk about overvaluation and market volatility, overvaluation and market volatility, many say correction cannot be ruled out. However, mutual fund managers and financial advisers feel small-cap schemes are still a good choice to create wealth in the long run. They agree that though the small-cap market has seen a steep rise in the last few months, investment into these schemes in a staggered manner could fetch them tremendous gain.
Small-cap funds normally invest in those companies that are ranked below 250 by market capitalization and are mandated by SEBI to invest at least 65% of their assets in small-cap stocks. However, these small companies usually go through more ups and downs compared to well-established large companies. Due to this fact, investments in small-cap are quite risky, especially for a short-term horizon. It is from this volatility of the small-cap segment that these funds are generally recommended only to aggressive investors with a high tolerance for risk and a long investment horizon.
Why Consider Small-Cap Funds?
Investment in small-cap mutual funds is highly risky but gives a good potential return in the long run. For example, small-cap funds have given an average return of 19% in the last 10 years. But to get such returns, investors have to be prepared for ups and downs in the market.
Investing in the small-cap segment is difficult, mainly because most of such companies are often less well-known, and information about them may be very limited. Some may have tall promises but they eventually underperform or even burst. On the other hand, successful small-cap stocks can become multi-baggers, increasing manifold value over time.
Picking the Right Small Cap Fund
It follows, then, that investment in small caps means selecting a well-informed fund manager specializing in such stocks. It is also important to check how a scheme has fared during market downfalls.
Here are some of the best-performing small-cap mutual funds in September 2024:
1. Axis Small Cap Fund: Axis Small Cap Fund primarily invests in high-growth small companies. Although this fund has repeatedly given excellent returns, the investors are expected to have a fairly long-term horizon owing to the volatility in this market of small caps. High quality disciplined stock picking and businesses make this fund a preferred choice for aggressive investors.
2. SBI Small Cap Fund: SBI Small Cap Fund is one of the most consistent performers in the small-cap category. The fund looks to create a portfolio of emerging companies that exhibit strong growth prospects and demonstrate sustainable competitive advantage and visionary management-a long-term approach toward wealth creation. Thus, it will be suitable for investors with a moderately high-risk appetite who are looking at regular returns over a long period. Consistent performance year after year makes it one of the hot favourites among investors in the small-cap category.
3. Kotak Small Cap Fund: Kotak Small Cap Fund is ideal for those who want to harness the growth of smaller companies. The fund invests in well-researched small-cap stocks to create its portfolio. Despite the volatile nature associated with this segment, Kotak Small Cap Fund has the capability to churn good long-term returns, thus making it best suited for a high-risk long-term investor.
4. Nippon India Small Cap Fund: Nippon India Small Cap Fund majorly invests in relatively lesser-known high-growth companies. A well-diversified approach to investment across sectors reduces risk while leveraging returns to maximum effect. Given the inherent volatility in small caps, the scheme is suitable only for aggressive long-term-oriented investors who seek higher returns.
Approach and Methodology for Shortlisting Small Cap Funds
The following key parameters to judge these funds:
1. Rolling Mean Returns: Calculated on a daily basis over the last three years.
2. Consistency: Based on the Hurst Exponent (H), wherein the predictability of the fund’s net asset value, or NAV, is measured. A fund with a higher H has lower volatility.
3. Downside Risk: Calculated using the negative returns of the fund.
4. Outperformance: Considered based on Jensen’s Alpha. It is basically a concept that tells one about the return that is derived from an asset in relation to the broad market return.
5. Asset Size: Funds having less than Rs.50 crore of asset size are excluded.
By narrowing down to these very factors, investors will be able to find the best small-cap funds that have the potential to amass wealth for investors over a long period of time.
