How to get the best out of smallcap funds? Simply Save

Small-cap fund is one category where liquidity is poor and is riskier compared to large-cap and mid-cap funds. Yet, small-cap mutual funds have been among the most popular schemes of late.

In fact, in the last three years, these schemes got net inflows of nearly Rs 40,000 crore. Compared to this large-cap fund flows have been at a trickle, at Rs 4,700 crore.

Also read: Small-cap MFs outshine: Top schemes surge up to 12 times in 10 years

Therefore, the extra gush of inflows has forced some mutual fund houses to curtail fresh investment into these schemes.

Some schemes have stopped taking lump-sum investments, while other have put restrictions on systematic investment plans.

So, is there a bubble in the smallcap funds?

Also read: Is there a bubble in smallcap stocks? Not yet, say fund managers

Moneycontrol caught up with Ravi Kumar T V, Founder of Gaining Ground Investment Services to dig deeper into why smallcap funds have come into the limelight, what valuations of this space is telling us and how to check if a smallcap fund is becoming riskier.

Here’s a summary of what Ravi Kumar said:

-Fund managers, typically, buy stocks of smallcap companies with a view to hold them perpetually. If stocks appreciate faster in a limited time frame, managers consider some risk measures such as restricting inflows to ensure the performance is not affected.

-Given the good demand on the domestic side of the economy, and if the earnings support, smallcaps are better placed than largecap or midcap funds.

-In the short term, it's very difficult to predict any returns. But as the earnings growth is expected to be better going forward, valuations continue to be comfortable on long term basis. Investments in smallcap funds should be for long-term financial goals only.

-Most of the best smallcap funds have a very low churn ratio.

- Liquidity is how easy, fast and cheap one can buy and sell a company stock. The question of liquidity comes when there is a big selloff. It's not the size of the portfolio, but quality of the portfolio that matters for small cap funds.