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Bears have taken a firm grip over small and mid-cap stocks.
Toboot,the Nifty Smallcap 100 index has plunged nearly 27% this year after a nearly four year run-up in prices saw many small-cap stocks soaring.
Despite the slide, fund houses seem to be placing faith in small-cap funds again, launching new schemes or reopening older ones for fresh subscriptions.
Should investors take a cue and invest in such schemes
Back in comfort zoneFund managers believe the sharp correction in the segment has actually thrown up interesting opportunities.
Cooling valuations have tilted the risk reward scales in favour of certain stocks.
Fund houses have launched two new schemes in this space with Invesco Small Cap and Tata Small Cap closing for subscription recently.
Several existing small-cap funds that had placed restrictions on inflows due to higher valuations and fewer investment avenues, have reopened their gates.
DSP BlackRock Small Cap (earlier DSP BlackRock Micro Cap), LT Emerging Businesses and SBI Small Cap are accepting investments again.
Of the 500-odd stocks with a market cap of ₹1,000-8,000 crore,as many as 230 stocks have tanked more than 30% since the turn of the year.
Sixty stocks have lost more than 50% of their value.
Taher Badshah, CIO-Equities, Invesco Mutual Fund, says, “The valuation premium of the small-cap segment over Nifty has shrunk from 70% a year ago to around 15% now.
At these valuations, rewards can be high in the small-cap space.” “The correction is steep enough to make quality smallcap names more accessible.
Fund managers now have enough opportunity to deploy money without having to dig deeper into small-cap territory,” says Vidya Bala, head, Mutual Fund Research, FundsIndia.
Recently introduced rules that define the investible universe of stocks for different mutual fund categories have also prodded fund houses to reopen subscriptions.
Earlier, several smallcap schemes shopped stocks with market capitalisation of less than ₹4,000-5,000 crore,or those ranked beyond the top 400 in terms of market capitalisation, for their portfolio.
As per the new rules,small-cap funds can now pick stocks ranked beyond the top 250 in terms of market capitalisation for their core portfolio comprising 65% of the fund corpus.
The market cap of the 251st ranked stock today stands at around ₹8,000 crore.
This has widened the choice for small-cap mutual funds.
Many companies earlier considered mid-caps now qualify as small-caps.
In effect, smallcap fund managers can now create a more hygienic portfolio and not compromise on quality.
“Fund managers can invest in more proven names across sectors and not be compelled to dabble in lower quality names,” said Badshah.
What should investors do Experts say investors should not foray into this segment simply because funds are accepting investments again.
The correction may have opened up opportunities but investors should be careful of their asset allocation.
If you find that your portfolio is light in this segment, then use the correction as an opportunity to invest more.
While this segment is prone to high volatility, sharp corrections provide an ideal opportunity to invest as then the risk-return profile is more in your favour.
Planners say investors should only invest through the Systematic Investment Plan route.
By helping you fetch higher number of units at lower prices, SIPs allow you to make the most of corrections, normalise the volatility and deliver healthy returns over a period of time.
Those who had initiated SIPs in small-cap funds over the last 12-18 months would be staring at losses now.
However, they should not be disheartened.
Small and mid-cap mutual funds have proven to be highly rewarding for those who stayed invested over the long term.
Bala insists revised definitions make small-cap funds a more compelling space to invest in.
“Investors wanting to build long-term wealth should not only rely on a mid-cap fund.
The wealth generating opportunity is higher with small-cap funds.” However, investors should stick with funds with a proven track record over many years.
Also, the allocation towards small-caps should not extend beyond 20% of the portfolio.
Long term profile remains healthy Smallcap segment has rewarded investors in longer horizons
Fund AUM (Rs Crore)1-year returns (%)5-year returns (%)HDFC Small Cap4,9480.920.3SBI Small Cap1,038-7.729.7Reliance Small Cap 6,812-8.430.7Franklin India Smaller Companies 6,726-13.723.8Kotak Small Cap 733-14.120.2ICICI Prudential Smallcap 157-17.511.4DSP Small Cap 4,764-18.126.4Aditya Birla Sun Life Small Cap 2,051-21.120.7HSBC Small Cap Equity 5,03-21.623.1Sundaram Small Cap 1,022-24.021.1Mid-cap Funds avg returns-11.421.1Large-cap funds avg returns-0.712.1Multi-cap funds avg returns -5.715.8
