Investors make a beeline for small cap funds; Nippon gives 50% return

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The Nippon India Small Cap Fund has given an astronomical return of close to 50% in the last three years. Reason why investors in mutual funds are flocking to small cap funds to get more value for their investments. Mutual fund analysts opine that the small cap mutual fund category has been on a roll over the last few years.

Valuations in small cap funds have suddenly become very attractive. Small Cap Mutual Funds are those funds which invest a minimum of 65% of their assets under management (AUM) in equities of small cap companies.

Small cap mutual funds have given an average return of 19% in the last 10 years. Though select funds have far outperformed this number. The leader in this category is the Nippon India Small Cap Fund. This fund has given a return of 26.87% in the last one year, a massive 49.39% in the least 3 years and has a CAGR of 20% since its inception in 2010. The fund, which has the highest AUM in the category of Rs. 24,206 crore, has far outperformed the index. The Nifty Small cap 250 TRI gave a negative return of 0.13% last year and a return of 42.10% in the last 3 years (as on May 21, 2023).

Let’s take a look at the performance of some other small cap funds. Over the last 3 years, the Tata Small Cap Fund has given a return of 42.01%, the HDFC Small Cap Fund clocked in 44.66% while the HSBC Small Cap Fund gave a return of 45.03%. Clearly, the small cap space is big on returns.

Some investors believe that mutual funds with a large asset under management (AUM) becomes difficult to manage. This is far from the truth. A higher AUM reflects investor confidence in a fund, which naturally comes since the fund has performed beyond their expectations.

There is also a mistaken perception that a higher NAV means the growth potential of a particular fund is limited. The NAV of the Nippon India Small Cap Fund, for example, crossed 100 last month. This reflects the excellent performance of a fund over a period of time and Nippon India Small Cap Fund has given the highest returns in its category. The fund has a diverse portfolio of 172 stocks and the largest research team in the industry. A higher or lower NAV is actually irrelevant to investors buying units of a mutual fund.

While small cap funds are giving excellent returns, investors only with a good risk appetite should invest in them. Small caps have the potential to become mid-caps of tomorrow and are worth investing in. Over a medium or long term horizon of between 7 to 10 years, small cap funds should give you handsome returns on your money.

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