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Never Under-Estimate the Power of SMALL CAP

Over the last two years, in the unfolding Bull Run, small caps have monopolize the limelight. Since April 2021, S&P BSE 250 Small Cap TRI has delivered 106% as of July 2021, thus doubling an investment made in the index. Looking at the long-term figures, the picture is pale. The 7 and 10-year returns of the BSE 250 Small Cap TRI stand at a modest 13.4 and 11.3% p. a. respectively. This tells that the short-term smart performance of small caps may not reflect in the long-term, because of amid market corrections. The investors who are hypnotized by short-term returns from small caps need to put things in perspective with time.

The small-cap segment provides ample opportunities, as seen by the long-term returns of the top funds. Deciding to invest in this cap, must go with a fund that has proved its ability to navigate the funds and returns.

After the crash in March last year due to the pandemic, the segment witnessed an investor evacuation as the markets recover. From July 2020 till February 2021, small-cap funds experienced an outflow of Rs 4,300 crore. Noting, during the same frame, the AUM of the category grew at an annualized rate of 87%, thanks to the mega relay in small caps.

Time and again, whenever investors are fearful, and then miss out on the big Bull Run that follows the crash. Presently, it’s relevant to small-cap funds, where the return-generating periods come in cycles and those who are not invested during the times tend to have a dismal return experience. 

The small-cap category has outperformed all the major equity categories in 2020-21. At the end of July 2021, the one-year return of the small-cap category stand at an average of 108%, which is about 30% more than the returns from the mid-cap category, the next best performer. Thus, if you look at the returns over any of the shorter time-frames, the small-cap segment triumphs over all other major categories by a small margin. However, if we look at the other end of the spectrum, one sees that the quantum of outperformance over other categories significantly reduces as we increase the investment horizon.

Despite this, the small-cap segment does provide ample opportunities, as seen by the long-term returns of some of the top funds. Hence, if you decide to invest in this space, you must go with a fund that has proved its ability to navigate this tricky segment.

The investors in this high-volatility segment pay not just in terms of costs but also in terms of high emotional strain from time to time. If planning of investing in same, one must have the ability to digest high volatility. Also, given the recent high returns, moderate your return expectations. Like other equity funds, invest in small-cap funds only through SIPs.

Understand that small-cap funds should play supplementary role in any portfolio with allocation of 10-15%. For most investors, investing in three-four flexi-cap funds would satisfy to provide the necessity to the small-cap segment. Happy Investing.

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