Want to make the most of Small Cap Funds now? Here’s an ‘ideal’ strategy you can follow
The small-cap rally has evoked both hopes and fears among investors. While several funds have given very high returns in the last 3 years, analysts believe an abrupt correction in the small-cap segment is around the corner. Small Cap segment generally falls first whenever there is a market downturn.
Many investors are, therefore, wondering what should be the ideal strategy to follow in current circumstances. In an email interaction with FE Money, Arihant Bardia, CIO and Founder, Valtrust, an investment advisory firm, answers some important questions and an “ideal” strategy that investors should know. Edited excerpts:
AMFI data for July 2023 show that small-cap funds saw an influx of Rs 4,171 crore into their AUM, despite this some of the schemes stopped taking further inflows. Why is it challenging for the fund manager of a small-cap fund to effectively manage it? How does the fund size matter in the mid and small-cap segments? Is it of any concern for the investors?
Fund houses like Nippon and Tata had taken a break from fresh inflows, but the overall AUM for the small-cap category continued to expand. Due to the shallowness of the small-cap segment, the impact cost is very high for the fund manager with a very high AUM if they need to deploy into or exit from a specific stock. For instance, a 5% position in a Rs 30,000 crore fund means a position of Rs 1,500 crore.
The Fund Manager’s decision to enter or exit this position can create a humongous distortion of stock prices. Clearly, smaller-sized funds are better suited. Hence, in the case of a small-cap fund, the fund size is an important yardstick. Yet, there are funds like Nippon or SBI which are outperforming the smaller-sized funds with ease.
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