Small cap mutual funds gave up to 57% returns in one year. Should you invest?

Mid cap and small cap funds are back in action giving the maximum return of up to 36% and 57% in the last one year. These equity fund categories have gone through tough times in the past. Till a few months ago, these categories were giving an average double digit negative return. So what lies ahead. Can you expect similar returns in the future? Small cap funds on an average have generated 14% returns in the last one year and mid cap mutual funds have given slightly over 10% in the same time period.

Case of small cap mutual funds

Digging deeper shows that returns are skewed to the higher side due to a few funds, mostly the smaller schemes are giving high returns. In the small cap mutual fund category, Nippon India Small Cap Fund, the largest small cap scheme holding assets worth 9,925 crore, has given 13% returns in the last one year, the second largest fund, HDFC Small Cap Fund has given dismal returns of 0.51% in the same time period. The third largest fund, Franklin Smaller Companies Fund has given -2.18%, L&T Emerging Businesses, the fourth largest scheme has given -1.14% and SBI Small Cap Fund, the fifth biggest in the category has given 14% returns.

Small cap funds have given returns in the range of 57% and -2% in the last one year.

Stock markets have been very volatile in recent months and fund managers believe the performance of mutual funds in these categories depend largely on stock selection. This explains the wide range of returns among the scheme in these categories.

“Small caps have done well in recent past, one has to remember that this category has gone through tough times before this period. So, from the bottom, small caps and mid caps have done well. Overall markets move in cycles, and we see exaggerated cycles in small mid caps as they move exuberance (expectations of very high earnings growth and high P/E) to fear (profits decline, concern on survival and liquidity challenges). We believe stock selection is more critical and the key to wealth creation across large, mid and small companies,” says Srinivas Rao Ravuri, Chief Investment Officer-Equities, PGIM India Mutual Fund.

Case of mid cap mutual funds

The top performer in the category, PGIM India Midcap Opportunities Fund, managing assets worth 330 crore has given 34% returns in the last one year. The lowest returns in the same time period were -1.821% given by Motilal Oswal Midcap 30 Fund.

The biggest mid cap fund, HDFC Mid-Cap Opportunities Fund managing an AUM of 22,084 crore has given 7.46% returns in the last one year. DSP Midcap Fund has given 15%, Kotak Emerging Equity Fund, the third largest mid cap fund has given over 10% returns in the same time period, Nippon India Growth has given 8% returns and the fifth largest fund in the category, Axis Midcap Fund has given 11% returns in the one year period.

Should you expect similar returns from mid and small cap mutual funds going ahead?

The superior returns could be due to a lower base. Fund managers believe it would be unrealistic to expect such high returns from these funds.

“Last year has been very good for our fund, and we are following the same rigorous process for stock selection and fund management. However, it would be unrealistic to expect such returns from small and midcap category as economy is recovering very slowly and returns from equities can’t be in this range when the risk free return is only 6%,” says Srinivas Rao Ravuri.

Have realistic expectations

Do not fall only for returns. Understand the risk of investing in mid and small cap mutual funds. They are riskier than teh large cap funds. Invest in small and mid caps only if you have at least five to seven years in hand. Also look at your risk profile before choosing a fund.

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