Small-Cap Mutual Funds Fall 20% in Six Months – Is It the Time to Invest?
Small-cap mutual funds have lost nearly 20% of their value in the last six months. In a review of the sector’s performance, the number of funds that have lost value in this duration was found to be around 28.
Among them, the Mahindra Manulife Small Cap Fund experienced the largest loss, falling by around 24.69%. The HSBC Small Cap Fund and LIC MF Small Cap Fund were next, with losses of 23.48% and 23.45%, respectively.
Other small-cap schemes also fared poorly, with the Quant Small Cap Fund dropping by 22.74% and the Franklin India Smaller Cos Fund declining 22.72%. Nippon India Small Cap Fund, having the highest assets under management in this space, declined by 22.34% during this period.
On the other hand, Axis Small Cap Fund and Motilal Oswal Small Cap Fund posted lower losses of 15.87% and 13.70%, respectively.
Reasons Behind the Fall
Experts attribute the poor performance of small-cap funds to weak earnings growth and high valuations. Most small-cap stocks are currently trading at very high prices, which might not be sustainable.
Also, the lower earnings and very slow economic growth is impacting the country negatively. Small-cap stocks have also seen their prices drop, leading to lower returns.
At a recent mutual fund distributor meet, a veteran industry leader cautioned against the risks of investing in costly stocks. It was highlighted that even if an investor invests in a Systematic Investment Plan (SIP), investing in the wrong product at the wrong point in time may prove to be problematic.
Small-Cap Fund Inflows Still Growing
Despite these apprehensions, statistics from the Association of Mutual Funds in India (AMFI) indicate that small-cap funds kept drawing money. Small-cap funds saw Rs.5,720 crore flowing in during January, a 23% rise over Rs.4,667 crore in December.
This surge in inflows indicates that investors remain optimistic about small-cap funds despite the recent fall in the market.
Should Investors Take the Dip?
Investors are advised to stay calm rather than panic, but be prudent. The dip may be an ideal time for investors to invest in quality shares at discounted rates.
A proposed strategy is to adopt a 60-40 investment strategy, where 60% of the investment is made as a lump sum and the balance 40% is invested in a Systematic Transfer Plan (STP) over a period of 6 to 12 months. This strategy has the potential to minimize market timing risks. This strategy is only suggested for those investors who have a long-term investment horizon because short-term fluctuations in the market may persist.
Annual Performance of Small-Cap Funds
So far this calendar year, small-cap funds have lost around 19.98%. The worst performer has been the LIC MF Small Cap Fund, down 24.90%.
The Quant Small Cap Fund and Axis Small Cap Fund declined by 17.19% and 16.79%, respectively. The Quantum Small Cap Fund was better, with the lowest fall of 13.84%.
Benchmark indices for small-cap schemes, the BSE 250 Small Cap – TRI and Nifty Smallcap 250 – TRI, have fallen by 21.34% and 21.94%, respectively, to date.
The short-term prospects for small-cap funds are unclear. But being picky about undervalued stocks and selecting the appropriate fund can enable investors to take care of risks.
A 60-40 investment plan (60% lump sum and 40% STP) can be useful in handling market volatility with an eye on long-term growth. This investment plan is best for individuals who have the capability to remain invested for a longer duration.
Risk tolerance, investment objective, and financial horizon are always to be considered before investing in small-cap funds to arrive at the right choice.
