Best Small Cap Funds to invest in 2018

Best small cap funds

Best Small Cap Funds to invest in 2018

Small Cap Funds – As per SEBI’s new categorization of mutual funds, to ensure uniformity with respect to investments in equity schemes, small cap has been defined as 251st company onwards in terms of full market capitalization. In a small cap fund, a minimum of 65% of total assets is invested in equity and its related instruments. 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. 

Before jumping into the list of top small cap funds to invest in 2018-19, let us review the benefits that small cap fund provides:

  1. 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.

  1. 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.

  1. 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.

We strongly recommend you to consider following factors while deciding to invest in ELSS funds:

  1. Consistency: Consistent performance of any fund should be taken into account while investing in it. Especially check for the highlights of funds during fluctuations in the markets.
  2. New SEBI reclassification of mutual funds can be viewed in the sense of positive outlook as it brings out uniformity across various products. However, realignment of portfolio required across different schemes in order to adhere to the new norms which would probably increase volatility, especially in the small- and mid-cap funds. But do not panic, as the volatility can be optimally managed by spreading the exercise over a longer duration of time.
  3. Assets under management: AUM matters for small cap funds. Higher AUM is not advisable for small cap funds. As the market cap of small cap companies is low, if AUM of a small cap fund becomes high it will not be able to find investing opportunities.
  4. Ratios:
    1. Beta: It measures the performance of fund in terms of volatility of the fund given the changes in market. Lower the beta, safe is the fund.
    2. Sharpe Ratio: It serves as a measure of the performance of the investment by adjusting for its risk. Higher the value of this ration indicates better performance of the fund.

Here is the list of top 3 best small cap funds which you can consider for investing for the financial year 2018-19

Best Small Cap funds

 Reliance Small Cap Fund

The fund is not very old but in the 6 years since its launch it has given stupendous returns. The fund invests 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.

Highlights: 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%.

Performance in last few years: 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.

AUM: Rs.3736.45 Cr.

This fund is suitable for very aggressive investors who are willing to absorb the volatility in lieu of higher upside possibility over long term.

Risk & volatility measures:

The beta and sharpe ratio for this fund as of now stands as 1.09 and 0.99 respectively.

Franklin India Smaller Companies Fund

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%.

Highlights: Launched in 2007, this fund has beaten the benchmark (NIFTY Free Float 100) 7 times in last 10 years.

Performance in last few 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.

AUM: Rs.5650.12 Cr.

As the Reliance small cap fund, this fund is also suitable for aggressive investors who are willing to absorb the volatility in lieu of higher upside possibility over long term.

Risk & volatility measures:

The beta value for this fund as of now stands as 0.73.

Kotak Emerging Equity Scheme

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.

Highlights: 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.

Performance in last few years: 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.

AUM: Rs.1940.37 Cr.

This fund is suitable for very aggressive investors who are willing to absorb the volatility in lieu of higher upside possibility over long term.

Risk & volatility measures:

The beta value for this fund as of now stands as 0.86.

Let us see some of the key performance parameters of these funds:

Best small cap 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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Best Small cap funds

New to Mutual Funds? Learn more about basics of mutual funds here.

Visit our website to know more about WealthTrust. Do read our blogs on Mutual funds.

Next Read:

Best Equity Mutual Funds to Invest in 2018 – 2019

Best ELSS Funds to invest in 2018 – 2019

Best balanced funds to invest in FY 2018 – 2019

Best large cap mutual funds to invest in FY 2018 – 2019

3 Comments on “Best Small Cap Funds to invest in 2018”

  1. Very nice presentation,thanks for it.
    I have one doubt about finalization of /choosing which MF.
    After fixing goal and terms which fund will give the highest return.
    Pl.guide

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