Should you invest in small cap mutual funds

1. A mutual fund's risk depends on its exposure to companies.
2. There's also no guarantee that a risky fund will generate high returns.
3. The fund manager's ability, hence track record, to patiently select stocks for these 3 types of funds is of paramount importance because:-
a) Risk levels in the broader market keep changing,
b) It's his own perception of the individual stock during selection,
c) Various sectors tend to move in different cycles,
d) He has a larger universe of stocks to select from, and
e) He has to withstand redemption pressure from "impatient" investors.
4. A better way to select small-cap funds is higher star ratings and long-term returns among this specific category since these indicate a proven track record and performance history.
5. Choose a fund through peer performance ranking across a common time period, preferably from within the top 25%.
6. As no single fund stays in the top quartile at all times, check how soon it rebounded after slipping, and whether it continued to stay in the top 50% for over a year.
7. Review annually and replace a laggard if it slipped for four quarters in ranking, as the fund manager cannot correct such downfall soon enough.
8. Patiently investing in small-cap funds through SIPs is also preferable, with 5-yr+ time frame for allowing cost-averaging during a full market cycle.
9. As per Sebi's mandate, a small-cap fund will invest 65% min. (up to 100%) in small-cap stocks, while the rest can be all others like large-cap, mid-cap and debt products, depending on the investment style decided by various AMCs. 

Some of the best small cal funds to invest in India are :
1. SBI small cap fund
2. Reliance small cap fund
3. HDFC small cap Fund

Share: