Small-cap mutual funds have become increasingly popular among investors seeking significant returns, often accompanied by various levels of risk and volatility. A recent study by Ventura Securities sheds light on where these funds are placing their bets, demonstrating particularly interesting trends within market capitalization ranges.
According to the study, small-cap funds allocate approximately 80% of their investments to small-cap stocks, with notable percentages also directed toward midcap (11%) and large-cap (8%) stocks. Within the small-cap segment, entities ranked between 251 to 500 by market capitalization receive about 50% of the funding, indicating investors' confidence in this mid-range allocation. Meanwhile, 29% of investments fall within the 501 to 1,000 rank, and only 2% reached beyond the 1,000 threshold, showcasing the reluctance to venture too far from established players.
Since the fiscal year 2019-2020, small-cap mutual funds have attracted considerable inflows, accumulating around Rs 1.03 lakh crore—approximately 12% of total inflows received by equity mutual funds during the same period. By comparison, thematic or sectoral funds have outperformed small-cap funds significantly, drawing in around Rs 2.27 lakh crore with 27% of total inflows.
Analyzing specific stocks provides compelling insight as well. The stock ranking at 251st position back in December 2019 experienced remarkable growth, increasing four times its value by December 2024. Similarly, stock ranked 500th saw its valuation grow sixfold, and the stock at 1,000th place experienced eightfold growth during the same timeframe. This data reflects not merely the growth of companies but changes within market classifications; today's 500th-ranked company would have been categorized as midcap back in 2019, highlighting the rapidly changing market dynamics.
For example, TTK Prestige, currently ranked 498th, has a market cap of Rs 11,714 crore, showing how companies can quickly climb the ranks through performance and market demand. Contrastingly, SMS Pharma, holding the 1,201st spot with Rs 2,061 crore market cap, indicates how companies can ascend or descend within the ranks based on fluctuated performances.
While the potential for massive returns within small-cap investments is evident, the study suggests investors should be prepared for significant volatility and maintain patience throughout their investment period. Small-cap funds, by their nature, necessitate embracing volatility and undertaking a longer holding period to see favorable outcomes. This aligns with advice from investment experts, stating, "To achieve high returns, simply focus on three principles—embrace volatility, be patient, and maintain a longer holding period." Such principles underpin the investment strategy for small-cap funds and resonate with broader market philosophies about risk.
Performance-wise, among the 23 small-cap schemes monitored for over three years, 22 surpassed the benchmark Nifty 500 TRI based on the Compound Annual Growth Rate (CAGR) across both one-year and three-year timelines. Bandhan’s small-cap scheme notched the top-performing spot with impressive 30% CAGR over three years. Yet, it’s important to note the associated risks, shown through high beta values—Bandhan’s small-cap scheme has high beta, indicating potential for greater fluctuations.
On the other end of the risk spectrum, SBI’s small-cap scheme boasts the lowest beta at 0.66, demonstrating stability and maintaining one of the lowest downside capture ratios, proving its robustness and appeal among conservative investors. This varied performance stems not only from investment choices but the characteristics and management of individual funds and their inherent strategies.
Meanwhile, American Century Global Growth Investor (TWGGX), classified under global equity and listed as part of the small-cap sector, struggles with disappointing performance metrics. With a Zacks Mutual Fund Rank of 5 (Strong Sell), AWGGX has garnered attention for its lackluster returns and high volatility, contrasting the above-discussed success stories of small-cap investments. Over the last five years, this fund has posted annualized total returns of only 10.11%, statistically placing it mid-tier among competitors with risks pegged at higher levels.
Investors eyeing mutual funds need to carefully weigh individual performance against the wider market movement to evaluate merits based upon their investment strategy and risk tolerance. This inherently contrasts with the volatile but potentially lucrative world of small-cap mutual funds, where rapid growth can translate statistically to significant long-term gains, but requires believers to weather the sometimes tumultuous waters of market fluctuations.
With the inherent unpredictability of investments, success is not guaranteed; nonetheless, strategic allocation, informed by historical performances, can lead investors down paths of fruitful exploration within the less-charted territories of small-cap investments. Understanding these nuances provides both clarity and direction to prospective investors eager to explore the vast fields of small-cap mutual funds.
