In the past year, small-cap mutual funds have faced significant challenges, as evidenced by the fact that 26 out of 27 such funds delivered negative returns on Systematic Investment Plan (SIP) investments. Small-cap funds, which focus on investing in smaller, often more volatile companies, typically carry higher risk. While these funds can deliver strong returns in booming markets, they are also highly sensitive to market downturns, which has been the case recently.
Performance Overview
The small-cap mutual fund category witnessed some of the worst performance over the last 12 months, with only Motilal Oswal Small Cap Fund managing to deliver positive returns. This highlights the risk involved in investing in small-cap funds, particularly in a year marked by market volatility and economic uncertainty.
Top Underperformers
Quant Small Cap Fund: Delivered a negative XIRR of -22.45% on SIP investments. A monthly SIP of Rs 1,000 in this fund would have grown to only Rs 10,631.
Mahindra Manulife Small Cap Fund: Fell by -21.84%, meaning an SIP of Rs 1,000 monthly would have amounted to Rs 10,670.
Aditya Birla SL Small Cap Fund: Had a negative XIRR of -20.90%.
Franklin India Smaller Companies Fund: Delivered a -18.25% return on SIP investments.
Nippon India Small Cap Fund: Despite being the largest in terms of assets, this fund also recorded a negative return of -17.93%.
Other notable underperformers include:
- Canara Robeco Small Cap Fund: -17.06%
- SBI Small Cap Fund: -16.38%
- Tata Small Cap Fund: -15.03%
- HDFC Small Cap Fund: -15.00%
Moderate Losses
- Kotak Small Cap Fund: -13.90%
- DSP Small Cap Fund: -12.74%
Smaller Losses
- Axis Small Cap Fund: -8.49%
- Quantum Small Cap Fund: -8.45%
- Invesco India Smallcap Fund: -7.92%
- UTI Small Cap Fund: -6.30%
- Bandhan Small Cap Fund: The lowest loss at -6.19%.
The Only Positive Performer
Motilal Oswal Small Cap Fund: Stands out with a positive XIRR of 1.05% on SIP investments, making it the only small-cap fund to deliver positive returns in the last year.
Expert Advice for Small Cap SIP Investors
Many experts believe that small-cap mutual funds are not suitable for short-term investors due to their inherent volatility. Rajesh Minocha, a Certified Financial Planner, emphasized that SIPs should not be expected to provide short-term returns. Investors often chase past performance without understanding the risks, and this can lead to disappointment, as seen in this year’s results. According to Minocha, SIPs are better suited for long-term investors who are focused on financial goals over a 15-20 year horizon. He recommends asset allocation and periodic adjustments to weather volatility rather than panic withdrawals.
Similarly, Harshad Patwardhan, Chief Investment Officer at Union Mutual Fund, suggested that investors should stay committed to their SIPs, especially if they believe in the long-term prospects of India’s economy and equity markets. Trying to time the market can lead to missing out on potential gains when the market turns upward. Investors should let fund managers handle the market fluctuations and continue focusing on their long-term goals.
Key Takeaways
Focus on the long-term: Small-cap funds are best suited for investors with a long investment horizon who can ride out market volatility.
Avoid panic withdrawals: Discipline and periodic adjustments can help investors stay on track with their financial goals.
Diversification: Instead of relying solely on small-cap funds, consider diversifying into large-cap or multi-cap funds to manage risk better.
Conclusion
The past year has been a tough one for small-cap mutual funds, with most of them delivering negative returns on SIP investments. However, investors with a long-term perspective and a high risk tolerance may continue their SIPs, focusing on asset allocation and periodic portfolio reviews. As always, it’s crucial to remain patient, as volatility in small-cap investments is a given, but the potential for long-term growth remains intact if managed wisely.
Related topics: