Best Small Cap Mutual Funds to Invest in 2019

Here’s the list of the best mid cap mutual funds to invest in 2019…

  • SBI Small Cap Fund
  • L&T Emerging Business Fund
  • HDFC Small Cap Fund
  • Franklin India Smaller Companies Fund
  • Reliance Small Cap Fund

Here are the parameter scores of the above funds according to Finpeg CRAFT Framework…

best small cap mutual funds to invest in 2019 india finpeg craft

To understand the parameters in detail, please refer to Finpeg CRAFT Framework

You can refer to the following pointers to understand what each of these parameters mean in short…

    • Long-term Percentile Rank
      This is average percentile rank of the fund since Jan 2004 based on 3-year return. This is a measure of a fund’s performance with respect to its peers. Lower the rank, better the performance.
    • Top25 Percentage
      This is the percentage to capture the number of times the fund was in top 25% since Jan 2004. This is a measure of consistency of performance of a fund. Higher the percentage, better the consistency.
    • Downside Deviation
      A variant of standard deviation. It only captures deviation below the average return. This captures the risk associated with the fund. Lower the deviation, lower is the risk.
    • Near-term Percentile Rank
      Average percentile rank of the fund in last 1 year based on 1-year return. This is a measure of a fund’s recent performance with respect to its peers. Lower the rank, better the performance.
    • Average Return in 2008-09
      Average 1-year return delivered by the fund during the crash of 2008-09. This captures the performance of the fund during times of stress.

Why SBI Small Cap Fund is the best small cap mutual fund to invest in 2019

SBI Small Cap Fund topping the list of best small cap mutual funds should not come as a surprise to anyone.

It is popular as the mutual fund which gave a triple digit return in one-year’s time! (2014-2015)

When a mutual fund doubles investor’s money in a year’s time, there’s something right that the fund does. Of course, this is something that is quite rare and should not be your return target from your mutual fund investments.

One might just carefully check the table above and think ‘Why is L&T Emerging Businesses Fund not the best small cap fund?‘ Although the numbers are largely in favour of L&T Emerging Businesses Fund, the fund started only in 2014. SBI Small Cap Fund, on the other hand, has robust performance since 2009. You have a rock star in the small cap space – Mr. SN Lahiri – managing the L&T Emerging Businesses Fund.

The third fund on the list is HDFC Small Cap Fund. While the numbers don’t reflect the true worth of the fund, the new manager Mr. Chirag Setalvad has changed the fund since his take over of the fund in 2014 and the fund’s performance since then has been top-class.

Honestly, you can choose any one or two or all three of the top small cap funds on the list and you will be rewarded. There is very little that separates them today.

The last fund on the list – Reliance Small Cap Fund probably deserves the top position on the list of best small cap mutual funds. But it doesn’t get it! And the answer is hidden in the last column of the table above.

Mr. Sunil Singhania was the fund manager until 2017 and largely responsible for the outstanding performance over the years. He left in 2017 and it is yet to be seen whether the new person at helm can achieve similar things at Reliance Small Cap Fund. Until then, it stays at 5th position on the list of best small cap funds.

What are Small Cap Mutual Funds

sebi recategorization equity mutual funds

As per the latest definition, large cap companies are the 100 largest publicly listed companies in the country. Similarly, the next 150, meaning the companies ranked from 101 to 250, in terms of full market capitalization are termed as mid cap companies. The all the other companies, ranked from 251 onward, are termed as small cap companies.

So, the mutual funds which primarily invest the money they receive from investors in small cap companies are termed as small cap mutual funds.

SEBI, after the latest recategorization, has mandated small cap mutual funds invest at least 65% of the money they receive in small cap companies. This restriction was absent prior to Feb 2018.

Who should invest in Small Cap Mutual Funds

It is generally recommended that you invest in small cap mutual funds only if you have managed to weather the volatility of mid cap funds and felt comfortable. This basically makes you ready to withstand the even higher volatility observed for small cap mutual funds. We will shortly see the historical returns and risks that we have seen for the best small cap funds in the past.

The above would have been sacrosanct without the SEBI recategorization enforcement. However, because the mid cap space has shrunk by quite a bit, a every mutual fund investor should strike a balance between mid cap and small cap allocation.

If you had any exposure to mid cap space by design, you should think of lowering it to a suitable number and compensate the delta with some small cap exposure. Meaning, if you have 20% exposure to mid cap funds, you could bring it down to 12-15% and increase/introduce small cap funds exposure by 5-8%. The numbers will vary investor-to-investor.

This could be viewed as your effort of maintaining the risk-return profile of your portfolio. This is an extension of the discussion already had in the blog Best Mid Cap Mutual Funds to Invest in 2019 where we first mentioned of the shrunk mid cap space.

What are the expected returns of Small Cap Mutual Funds

Small cap mutual funds, as risky they, are highly rewarding. Let’s see what the risk and returns are we looking at in this discussion of small cap mutual funds.

This exercise should be viewed as an attempt of helping you with the past performance of the small cap funds in absolute terms and nothing else.

For the best small cap mutual funds according to Finpeg, the following are the 3-year and 5-year rolling return and standard deviation.

best small cap mutual funds to invest in 2019 finpeg craft framework

Note – NAV considered is of regular and growth options of the funds and for the period 1st Jan 2010 to 31st Dec 2018

To know what are the best mutual funds in other categories like large cap, visit this page.

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