Given the sharp correction in broad equity markets and even sharper correction in the small cap space, a few fund houses such as SBI MF, DSP MF and Nippon India MF have removed the maximum investment limit in their small cap funds.
Usually, fund houses cap the maximum limit in any scheme or stop fresh inflows altogether when they feel that there are not enough attractive opportunities.
SBI MF said that the decision was taken following the current market conditions. In a press release, Nippon India MF said that given the current valuation and anticipated growth rebound, the fund house expects small caps to outperform over the next 3 years.
Vinit Sambre, Head - Equities, DSP MF said in a note, “Over the last two years, the S&P BSE Small Cap TRI has fallen cumulatively by nearly 56%. As a result they have the ability to invest in great businesses at attractive valuations thereby making the risk/reward proposition favorable at current valuations.”
In 2013 S&P BSE Small Cap Index had corrected by nearly 12%. Over the subsequent years i.e. 2014-17 period, the small cap index generated a CAGR of nearly 30% substantially outperforming the large cap segment.
Nippon India MF sees the current market phase similar to 2013 wherein, a significant correction has been seen in the small cap stocks over the past 18 months.
Should you recommend small cap funds to your clients?
Suresh Sadagopan of Ladder7 Financial Advisories feels that from a valuation perspective, small cap stocks have corrected sharply. But given the risks of a significant slowdown because of the covid-19 outbreak, small cap companies are the most vulnerable as well. In fact, most of the mid cap companies remain vulnerable to such a slowdown. Therefore, Sadagopan feels that it is better to park money in multi cap funds where the fund manager has the flexibility to invest across market caps.
Vinod Jain of Jain Investment is of the view that investors should stick to the market cap allocation in their portfolio based on their risk appetite. “It is not like only small cap stocks have fallen. Large cap and mid cap stocks have fallen as well. Therefore, investors should increase their equity weightage accordingly. For example, if an investor had allocated 10% of their portfolio to small caps and after the correction it has reduced to 8%, clients should rebalance it back to 10%.”
Vishal Dhawan of Plan Ahead Wealth Advisors is also of the view that investors should stick to the market cap allocation in their portfolio based on their risk appetite. Further he insists that investors should refrain from lump sum investment in small cap funds and only opt for SIPs or STPs.
