Mumbai: Small-cap mutual funds have gained popularity among investors looking for high growth potential. These funds primarily invest in companies that are relatively smaller in market capitalisation, often under the radar of large institutional investors, yet poised for exponential growth. In Q1, several small-cap mutual funds increased their stakes in various small-cap stocks, signalling confidence in these companies’ future prospects. Among these, the Nippon India Small Cap Fund is a standout for its strategic moves in the market.
In this article, we will explore the top five small-cap mutual funds that have increased their stakes in Q1 and delve into their investment strategies and performance.
What Are Small-Cap Mutual Funds?
Small cap mutual funds invest primarily in companies that rank below the top 250 in terms of market capitalisation. These companies are generally smaller, newer, and less established compared to their large-cap and mid-cap counterparts. However, they offer tremendous growth potential as they can expand rapidly with the right business strategies and market conditions. Small cap mutual funds cater to investors with a higher risk tolerance, as these stocks tend to be more volatile but can offer superior returns over the long term.
Why Invest in Small-Cap Mutual Funds?
- High Growth Potential: Small-cap stocks have the potential for faster growth compared to large-cap and mid-cap stocks, as they can rapidly expand their market share and operations.
- Undervalued Opportunities: Small-cap companies are often under-researched, providing mutual fund managers the opportunity to identify undervalued stocks before they become widely recognised.
- Diversification: Small-cap funds offer diversification into lesser-known sectors and industries, reducing dependency on large-cap stocks.
- Long-Term Returns: While small-cap stocks can be volatile in the short term, they tend to offer significant returns for investors with a longer investment horizon.
Top 5 Small-Cap Mutual Funds That Increased Their Stake in Q1
1. Nippon India Small Cap Fund
- Fund Size: Rs. 30,000 crore+
- Expense Ratio: 1.72%
- Returns (5 Years): Over 25%
The Nippon India Small Cap Fund has been one of the leading small-cap mutual funds in the Indian market, and in Q1, it significantly increased its stake in several small-cap stocks. The fund manager’s focus on identifying emerging companies with strong growth potential has helped it consistently outperform other small-cap funds.
2. SBI Small Cap Fund
- Fund Size: Rs. 12,000 crore+
- Expense Ratio: 1.75%
- Returns (5 Years): Over 24%
The SBI Small Cap Fund also increased its stake in several promising small-cap companies in Q1, focusing on sectors such as engineering, construction, and financial services. The fund has a diversified portfolio that spreads across various industries, ensuring that it captures growth opportunities from different segments of the market.
3. HDFC Small Cap Fund
- Fund Size: Rs. 13,500 crore+
- Expense Ratio: 1.73%
- Returns (5 Years): Over 22%
The HDFC Small Cap Fund has also been active in increasing its stake in small-cap stocks during Q1. The fund manager has placed an emphasis on companies involved in sectors such as pharmaceuticals, consumer goods, and IT services. These sectors are expected to drive future growth, and the fund has strategically positioned itself to benefit from this.
4. Kotak Small Cap Fund
- Fund Size: Rs. 7,500 crore+
- Expense Ratio: 1.80%
- Returns (5 Years): Over 21%
The Kotak Small Cap Fund has been another key player in the small-cap space, and it increased its stake in several small-cap stocks during Q1. The fund’s strategy involves investing in companies with strong growth prospects in the manufacturing, chemical, and IT sectors.
5. Axis Small Cap Fund
- Fund Size: Rs. 9,000 crore+
- Expense Ratio: 1.81%
- Returns (5 Years): Over 23%
The Axis Small Cap Fund has been one of the best-performing funds in the small-cap category. In Q1, the fund increased its stake in several promising small-cap companies, particularly in sectors such as pharmaceuticals, engineering, and technology.
Factors to Consider Before Investing in Small-Cap Mutual Funds
While small-cap mutual funds offer high growth potential, they are not without risks. Here are a few factors to consider before investing in small-cap funds:
- Volatility: Small-cap stocks are more volatile than large-cap or mid-cap stocks. This means they can experience significant price fluctuations in the short term.
- Long-Term Investment Horizon: Small-cap funds are best suited for investors with a long-term perspective. It is essential to have a minimum investment horizon of 5 to 7 years to ride out short-term volatility and reap the rewards of long-term growth.
- Fund Manager Expertise: Small-cap funds rely heavily on the expertise of the fund manager. The ability to identify promising small-cap companies is crucial to the fund’s success.
- Expense Ratio: Ensure that the expense ratio is reasonable, as a high expense ratio can erode your returns over time.
- Risk Tolerance: Due to the high risk associated with small-cap stocks, these funds are more suitable for investors with a higher risk tolerance.
Conclusion
Small-cap mutual funds provide an excellent opportunity to invest in emerging companies with high growth potential. In Q1, several small-cap funds, including the Nippon India Small Cap Fund, increased their stakes in various small-cap stocks, reflecting confidence in their long-term prospects. These funds offer a pathway to significant returns, but investors must be prepared for short-term volatility.
Before investing in small-cap mutual funds, it is essential to carefully assess your financial goals, risk tolerance, and investment horizon. While these funds offer high returns, they also carry higher risks. Consulting with a financial advisor and conducting thorough research will help you make informed decisions that align with your long-term investment strategy.
