Best Small Cap Funds to invest in 2017
When you are constructing an investment portfolio for long term it is essential to have such funds in them which have high potential for growth. These funds will give the much needed boost to your returns in the long term. Small cap and mid cap funds are such funds which are though volatile but have high growth possibilities. In this article we will discuss the advantages of such funds and list down best small cap funds to invest.
Advantages of Small Cap Funds
- High Growth Opportunity
The small cap funds have higher growth potential because of their low base, for example it’s easier for a company to double its size from Rs 10 crore, than for a company to double its size from Rs 10,000 crore. Small cap companies are usually innovative and offer new product or service unlike those existing in the current marketplace. This allows these companies to grow more rapidly than larger companies which in turn benefit their investors.
- Potential of Undervaluation
As small and micro-cap companies are relatively unknown and generally have low or no equity research coverage, they can often be snapped up at a significant discount to their inherent value by fund managers.
- Efficient, Focused Companies
Small and micro-cap companies have extremely focused business model on account of their being new entrants and due to their small size. Therefore, small and micro-cap companies are focused and operate extremely efficiently. This focus helps them to grow rapidly and this expansion helps their investors in fast growth of their investments.
Best Small Cap funds
The fund is not very old but in the 6 years since its launch it has given stupendous returns. The fund has beaten its benchmark (S&P BSE Smallcap) in all the past 6 years and that too by a huge average of 15.35%. The fund invest around 70% of its portfolio in Small caps and around 20-25% in mid caps and the recent bull run in these stocks have helped it a lot. However, the fund has also contained its losses in bear markets and hence it is a good bet in the small cap space. It has given 31.39% returns in last 5 years as opposed to 18.72% returns of the benchmark and 27.85% returns of the category.
Launched in 2007, this fund has beaten the benchmark (NIFTY Free Float 100) 7 times in last 10 years. The fund underperformed in the first two years but since then it has captured the upward trends well and contained its losses in the downwards market. It has given 30.45% returns in comparison to 19.90% returns of its benchmark. The fund focuses on high quality companies and avoids the ones that do not have an established track record. The fund is overweight on mid caps as they constitute around 41% of its portfolio while small caps make up for around 43%.
The fund has its benchmark as S&P Mid Small cap index and currently its composition is tilted towards mid cap as they constitute around 55% of the portfolio while small cap currently have around 16% share. The fund has beaten the benchmark 7 times in last 10 years and has given 26% returns in last 5 years compared to 19.88% of the benchmark. The fund’s focus is on providing downside protection rather than targeting high alpha as some of its aggressive peers and hence it makes it a relatively safer bet in the highly volatile small and mid cap space.
Let us see some of the key performance parameters of these funds:
As said earlier, Small cap funds are must have in any long term investment portfolio. Do remember that the universe of small cap stocks is much larger than the large cap stocks hence the performance depends a lot on the stock picking skills of the fund manager. It is prudent to diversify your investment in small cap funds by choosing at least two different funds.
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