Small-cap funds, as the name suggests, invest in companies that are smaller in size. The definition of a small-cap as per SEBI is all stocks from the 251st stock listed on the stock exchange based on market capitalization. There are roughly 7800 companies listed on the Indian stock exchanges, so the universe for a small-cap fund is any stock from 251st to 7800th company. On a practical note, most mutual fund companies track 200-300 small-cap companies only which are considered investable. This is because many small-cap companies do not fit the criteria or thresholds of mutual funds, usually, they are ones that are either too small, have lesser liquidity or have bad financials. There are many small-cap funds, we will present to you the three best funds of the lot:
SBI Small Cap
This fund is from India’s top mutual fund house-SBI mutual fund and is managed by Mr. R Srinivasan. SBI Small Cap has continuously been a top performer for the last 5-7 years. It picks companies with high growth potential and quality balance sheets. The benchmark of the fund is the BSE Small Cap Index. This fund is rated Five Stars by Value Research which is the highest rating for any fund. This fund is our top recommendation among small-cap funds. Assets Under Management (AUM) of this fund are INR 3,280 crores.
Nippon India Small Cap
This fund was earlier known as Reliance Small Cap Fund. Nippon, which is a Japanese company, had bought Reliance’s stake in the mutual fund, so this fund is now known as Nippon India Small Cap Fund. This fund invests in companies with high growth prospects and a clean balance sheet. The benchmark for this fund is the BSE Small Cap Index. This fund is rated Four Stars by Value Research. The AUM of this fund is INR 6,995 crores.
HDFC Small Cap Fund
HDFC Small cap fund is run by HDFC mutual fund which is the second largest fund house in the country. This fund has a stellar track record and is managed by Mr. Chirag Setalvad. It invests in companies that have low debt, high cash flows and offering good growth. The benchmark for this fund is Nifty Small Cap 100. This fund is rated Four Stars by Value Research and the AUM of the fund is INR 6,835 crores.
Let us look at the past returns (in %) of these three funds:
|Fund Name||Last 3 years||Last 5 years||Last 7 years|
|SBI Small Cap||2.23||8.90||20.09|
|Nippon Small Cap||-5.24||5.44||18.69|
|HDFC Small Cap||-7.23||2.50||10.48|
When we look at these figures, it’s evident that the last 3 years have been rough for small-cap funds with negative returns for 2 out of the three funds. But when we look at the last 7 years, returns are very handsome. Between the period 2014-2017, small-cap funds delivered the best returns, upwards of 15% every year and then there was a correction from 2018 onwards. The fall in markets in the last 3 months due to COVID has seen small-cap funds falling more than their mid or large-cap counterparts. However, in the wake of this fall, most of the small-cap funds present a good entry point. People who have a high-risk appetite should add more small-cap funds in their portfolio. Returns for the next 3-5 years should be pretty good.