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Small-caps funds have been providing returns that continue to remain exemplary. Going by the numbers, in the past year, these funds have offered 28% returns,
Comparatively, large-caps and mid-caps have provided returns to the tune of 18% and 22%, respectively.
If the three-year performance of small-caps funds is considered, the gains have been 39% on an annual basis, as per data of Morningstar India. On the other hand, large-cap funds have provided 21% returns.
The returns have been consistent by piggybacking on the manufacturing and infrastructure sectors, which have a relatively decent representation in the space of small-cap funds.
In the past three years, a push of sorts has been experienced, as per which the formal sector is proving to be dominant over the informal one in terms of the market share.
All these changes are leading to companies registering a gain in terms of efficiency of scale and making their presence felt in foreign markets.
As a result, companies engaged in mining, construction, and manufacturing activities are on a growth trajectory. For the past three years, these companies have been registering a growth of about 20%. Comparatively, the large-cap space doesn’t tend to offer such opportunities.
Another factor has been the change in dynamics when it comes to the risk-taking appetite of investors that have come to aid small-cap funds gaining significantly in terms of inflows.
When the large-cap funds had been experiencing consolidation, small-caps were going through a relatively rough patch since October 2021. This was the phase when the Nifty Smallcap 100 nosedived from 12,000 to 9,000 levels in April 2023 against the background of a banking crisis emerging in the US and Europe.
However, as an investor, it needs to be taken into account that small-cap funds tend to carry a significant level of risk. To invest in small-cap funds, investors should be focused on a minimum time horizon of at least seven years, considering their inherent volatility.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
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