Small-cap funds have returned big. But should one be investing in them at current levels?
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Since 2005, the BSE Small-Cap Index has seen three major corrections, and anybody who entered during these bear markets has made a lot of money.
Nippon India Small Cap Fund is one such fund that delivered huge returns to its subscribers so far. The overall small-cap space has had one of the best rallies over the last decade. The Nifty Small Cap 100 has returned 138% over the last one year against the Nifty 50’s 64%. This is in contrast with the long-term trend. Over the last 10 years, the Nifty 50 has returned 11% annually, compared with 10% for the small-cap index, which has a high standard deviation or volatility of returns at 33% as against 15% for the large-cap benchmark.
The current rally has been a big opportunity for those who managed to enter the small-cap space in April 2020. The small-cap index moves in spurts, and only a few investors can take advantage of this volatility. Our FOLLOWER TIER Service provided great early-stage multibaggers and more to publish very soon. If you are not a member, please do enrol immediately.
The beta, a risk measure for the small-cap index, is very high at 1.87. It simply means that if the Nifty moves up 100%, the small-cap index will rise 187%. But this is true the other way as well. So, this is a fast-moving market and if most funds are giving twice the return of the index, they are actually giving beta-related returns.
Small-caps can fetch big returns, but they are also one of the most difficult jobs in fund management. Even the best fund managers have a tough time maintaining their performance for the next rally. When investing in small-caps, the better idea is to enter and exit at the right time. But then that is easier said than done.
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