While investing, why small (caps) may not always be beautiful

Large cap funds, on the other hand, witnessed an outflow of Rs 5,239 crore in the April-July period. Inflows into mid cap funds were to the tune of Rs 6,356 crore.

Since the beginning of the current fiscal, while the 30-share Sensex has risen by 10.4%, small cap stocks have gained more than 31%. Mid cap stocks have risen by 26.3%.

‘Fear of missing out’

According to Association of Mutual Funds in India (AMFI) CEO N S Venkatesh, the increase in inflows into small cap funds in June was on account of a shift in investments from large cap funds to small cap funds in order to make gains amid a rally in the stock market.

Trust Mutual Funds CEO Sandeep Bagla said the better performance of small cap stocks over the past few months resulted in higher inflows. “If the price has gone up, the demand has also increased in anticipation that the price will keep going up,” Bagla said.

“This is a momentum kind of investing. It is not that anybody has any insight or confidence in the performance of small cap companies. Since small cap funds have given good returns in the past, there is an element of FOMO (fear of missing out),” Bagla said.

Herd mentality

Many retail investors follow the herd while investing in the capital market. When small cap stocks started rising, canny investors jumped in early. Others queued up later to pump money into small caps after seeing the rising returns from these stocks.

But when the market encounters a major correction, small cap stocks will be the first ones to tank. Most of the later investors would have purchased small cap funds when their net assets values were already high.

Investor strategy

Experts say investors should not be swayed by the past performance of small cap funds, and instead invest in a disciplined manner, maintaining balance. Bagla said that within equity, investors should first decide how much they want to invest in large, mid or small cap funds. Once a decision is made, they should stick to it, while rebalancing.

“If somebody has not allocated any money to small cap funds and wants to allocate a part of their portfolio, then it is justified. But if somebody has a very large percentage (of investment) in a small cap fund, then I would say book profit and do not increase exposure,” Bagla said.

Nippon India Mutual Fund’s Fund Manager and Head of Equity Research Ashutosh Bhargava said people should look at investing systematically and avoid lumpsum investments. “They should not restrict to small cap just because it has delivered superior returns in the one-to-three-year timeframe. The focus should be on large, mid, and small cap funds. Our advice will be to invest through a systematic investment plan (SIP) or systematic transfer plan (STP),” Bhargava said.