Small-cap funds are a rage, but should you buy?
Association of Mutual Funds of India (Amfi). The data explicitly states that small-cap funds, among all categories, were the biggest beneficiaries of a huge inflow of funds in the last six months. Small-cap funds started gaining momentum in March after they delivered eye-popping returns to existing investors .
Soon, the category featured on various trending sections of fintech brokers such as IndMoney, Groww, Kuvera, and Paytm Money. Then, herd mentality took over. Investors rushed in and started pouring their savings into the small-cap category.
“When any mutual fund category begins to deliver stellar returns, there is usually a heavy inflow into that category," said Arun Kumar, head of research at Chennai-based FundsIndia. In this case, the category delivered high returns largely due to the base effect. It had suffered the most during the market crash of 2018-19 and the covid pandemic years.
Small-caps are generally more volatile than large- and mid-cap segments. So, when the markets slumped in 2020, small caps took a bigger hit. Thereafter, when the markets started rebounding, small-caps stocks shot up and people sat up and took notice.
“Most investors look at one-year or three-year returns but if you take the returns from 2018 levels, they aren’t that great," said Kumar. To be sure, while companies like Value Research and Morningstar assign ratings to mutual funds, retail investors tend to focus more on past returns than expert ratings. However, the inflows coming into small-cap funds on the back of past performance is not always a good sign for the category.
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