Small cap funds, known for their golden pairing of high risk and high reward, have been a favourite among investors with a risk appetite. The category saw inflows worth Rs 3,070.84 crore in September, showing that investors were not shying away from these funds.
With the broader markets volatile, investors' approach to these funds may need to be modified. There have been several movements in the space, that call for a change in strategy and perception of these funds. Here are some factors that fund houses look for in small caps, to maximise long-term returns.
Sustainable Large Small Cap Funds
"Small cap (space) has become large as thematic funds have also invested in small caps," said Mihir Vora, chief investment officer of TRUST Mutual Fund. Thematic funds have held their place as the category with the highest inflow in actively managed equity.
The AUM of the category is recorded at 3.28 lakh crore for the month of September. There are certain segments that only have small cap stocks and not large caps, according to Vora. This allows mutual fund houses to pick up the stocks that have a longer runway of potential from this space.
"Both high growth rate and its sustainability is important. Small caps have a small base that will give high growth. The longevity of growth needs to be looked at," said Vora. Investors need to ensure that they evaluate their investments into small caps with the growth adjusted returns.
SIP: Key To Sustainable Returns
The category has seen significant growth in the recent past and the price tags of stocks have also reflected the same.
"We have been in a territory where valuations look expensive," said Varun Fatehpuria, founder of Daulat Wealth Management. This has been the case in the last 12-14 months, he said.
Both the price and the movement is supported by strong earnings growth in the category, according to him. Despite this, investors need to understand the seasonality in the category and venture into the space if their portfolio has the risk tolerance for the same.
For those investors looking to venture into the space, lumpsum is not the only route of investing.
"As a general practice, we advise clients to invest in small caps through the SIP route since it averages out their investment cost over some time," said Fatehpuria.
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