Companies with a market capitalization of between Rs 10 million and Rs 500 million are classified as "Small Capital". This article covers the following:
What are the best small cap mutual funds?
Company size is one of the critical factors to consider when structuring your equity portfolio. The range of risks and opportunities of a portfolio of stocks depends on the size of the company. The best small-cap mutual funds often invest in small business stocks that have the potential for growth. These stocks may double or triple in a very short period, but this also means that the performance of these funds is subject to high volatility.
Who should invest in the best small cap Mutual funds?
Small cap funds are known for their potential to generate high returns. Small-cap funds are more likely to outperform the benchmark when markets are bullish. However, when markets go into recession, the fund's net asset value is drastically affected. If you are willing to take some risks to improve your portfolio returns, you can choose to invest in small-cap funds. Investing a small portion of your portfolio in long-term small-cap funds is a great way to generate good returns.
Things an Investor Should Consider When Investing in the Best Small Cap Mutual Funds
Small cap mutual funds are subject to market risk, and investors should consider the various components that affect the fund's performance. You must take into account your age, risk tolerance, investment objective, and investment horizon. Here are some other things to remember before investing in small funds:
Choose those small cap mutual funds that balance your portfolio. Consider investing in small-cap funds that invest in small-cap stocks in various sectors. It is advisable to avoid funds that are invested mainly in a few stocks. You can also see the pace of the fund's trading activity. Successful funds tend to have a portfolio turnover ratio of less than 30%.
- Past performance of the small mutual cap funds
Keep in mind that when deciding on a particular mutual fund, you cannot rely solely on recent performance, no matter how well it performed. You should be aware of the fund's performance in bullish and bearish market cycles. Find out the returns for the last five years and compare them to peer funds. If the fund is stable in all market conditions and periods, you can go ahead with it.
The P / E ratio will give you an idea of the fund's primary growth potential. It will also tell you how much you are pushing your fund to grow. Small-cap mutual funds with a P / E ratio of more than 30 times are expensive.
- Choosing a high-quality fund house
Do your research and choose those fund houses that have a history of exceeding benchmarks in both the highs and lows of the market. The ideal fund house should have a flawless investment process combined with risk management technology, an expert research team, and excellent coverage.
- Know what your options are
You must choose between risk and reward. Explore options that allow your small capital to finance the much-needed flexibility to hold a large amount of cash or even invest in large-cap and mid-cap stocks. Doing so will undoubtedly reduce the return on your funds compared to those with smaller capitals, but you will keep more cash.
- Get an experienced fund manager
Seek the advice of an experienced and experienced fund manager because choosing smaller funds requires qualitative analysis. The fund manager must also have a strong performance record.
- Returns must be risk-adjusted
There is no question that small cap mutual funds carry risk, but there are funds that can manage risk better than their peers. Explore the options and potential for good returns from various low volatility charts.
How would you rate the best small-cap mutual funds?
Investors should consider specific financial ratios when evaluating mutual funds. Some of the important ratios to consider are the following:
Standard deviation measures the dispersion of a data set from the mean or average. In finance, the standard deviation refers to the annual rate of return on any investment and also highlights the volatility of an investment. A stock with a higher standard deviation has a more significant price range and indicates higher volatility compared to a stock with a lower standard deviation.
This ratio measures the risk-adjusted performance of the portfolio. A financial portfolio with a higher Sharpe ratio is considered a relatively superior portfolio compared to its peers. Sharpe Ratio = (Average Fund Return - Risk Free Rate) / Standard Deviation of Fund Return
R-Square displays the percentage of funds returns that align with the standard returns. The R-Squared value is between 0 and 1 and is reflected as a percentage from 0% to 100%. If the fund has a 100% R-Square, then the movements in the index explain the movements of its securities. A higher R-squared value indicates a more useful beta number. Example: A fund is said to offer a higher risk-adjusted return if the R-Square is close to 100%, but the Beta is less than 1.
Beta is an indication of a fund's sensitivity to movements associated with a benchmark. If the fund has a beta of 1.0, then it is as volatile as the benchmark. If the fund has a beta, 0.70 or less, that means it is 30% less volatile than the benchmark, and if the beta is 1.30, this indicates that the fund is 30% more sensitive than the benchmark. benchmark index.
Alpha is a measure of the asset manager's ability to make a profit when the benchmark also makes a profit. Alpha can be less than, equal to, or greater than 1.0. The higher the alpha level, the more important the manager's ability to benefit from index movements.
Advantages and Disadvantages of the Best Small Cap Mutual Funds
Advantages of investing in small funds
Historically, the best small cap mutual funds have provided massive growth and profitability. Since these stocks are subject to comparatively less scrutiny and trade by large investors, there is also a good chance of discovering some undervalued stocks among smaller small-cap equity fund companies.
Disadvantages of investing in small cap mutual funds
Small cap mutual funds are riskier and more volatile compared to ELSS or large cap funds. The risk factor makes small funds unsuitable for the novice investor, but ideal for the seasoned investor or those with a high appetite for risk. It is also difficult to find profits among small-cap funds because small companies tend to reinvest the profits in growing their business, unlike large companies.
Top 10 Small Cap Mutual Funds in 2021
Based on the Small Fund Performance Index values, these are some of the top equity funds. The rankings made here are for a consolidated list of equity funds with a three-year return.
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