Small-Cap Funds: How Good Are They?

Dalal Street Investment Journal|May 25, 2020

Small-Cap Funds: How Good Are They?
While small-cap funds can go through meteoric highs like large-cap and mid-cap funds, what is important is to note what happens when the downward slide begins. How much time do small-cap funds take to recover? And then is it worth the risk to invest in small-cap funds? The article provides the ‘truth and dare’ equation

The global pandemic following the outbreak of the virus in China has led to the rout of not only the frontline indices but also the mid-cap and small-cap indices. Though we have seen a bit of recovery from the recent lows, yet, the fall has been significant. Even currently the markets have been more or less flat with a negative bias. Both broader and frontline indices have seen a negative return over a three-year period. Nevertheless, the broader indices have underperformed the frontline indices. The graph below shows the performance of different indices in the last 10 years.

It clearly shows how the small-cap and mid-cap have underperformed the large-cap indices in a different time period. The worst performers have been the small-cap indices that failed to generate positive returns over five years. Some of you will argue that point to point returns may hide the outperformance in between. Therefore, to understand it better we have also plotted the daily price chart of the indices for the last 10 years.

As can be seen from the above graph, for most of the time over the 10-year period, small-cap indices have underperformed large-cap and mid-cap indices. Therefore this leads us to the prime question about whether at all you need small-cap funds in your portfolio. The mutual funds dedicated to small-cap also follow the small-cap indices in terms of performance. They have also performed in tandem with the index. Small-cap funds are relatively new (the first fund was launched in the year 2005) compared to large-cap and mid-cap funds that can be traced to the nineties. Small-cap funds gained major traction during the market rally of late 2013. Due to the stellar performance of small-cap funds during the 2014 rally, many people started fresh investments through a systematic investment plan (SIP).

articleRead

You can read up to 3 premium stories before you subscribe to Magzter GOLD

Log in, if you are already a subscriber

GoldLogo

Get unlimited access to thousands of curated premium stories and 5,000+ magazines

READ THE ENTIRE ISSUE

May 25, 2020