1. Any mutual fund's risk depends on its exposure to companies.
2. As per Sebi, a small-cap fund will invest 65% min. (100% max.) in small-cap stocks, while the rest can be all others like large-cap, mid-cap and debt products, depending on the investment style decided by various AMCs.
3. Also, as per Sebi, small-cap companies are 251st company onwards, in terms of market capitalization as enlisted by Amfi, which is updated every 6 months.
4. Therefore, a small-cap fund's performance is very much dependent on its fund manager's ability to patiently select these small-cap stocks in its portfolio because:-
a) Risk levels in the broader market keep changing,
b) It's his own perception of the individual stock during selection,
c) Various sectors tend to move in different cycles,
d) He has to select from a universe of lesser-known stocks, and
e) He has to withstand redemption pressure from "impatient" investors.
5. A better way to select small-cap funds is higher star ratings and long-term returns among this specific category since these indicate a proven track record and performance history.
6. Choose a fund through peer performance ranking across a common time period, preferably from within the top 25%.
7. As no single fund stays in the top quartile at all times, check how soon it rebounded after slipping, and whether it continued to stay in the top 50% for over a year.
8. Review annually and replace a laggard if it slipped for four quarters in ranking, as the fund manager cannot correct such downfall soon enough.
9. Patiently investing in small-cap funds through SIPs is also preferable, with 5/10-yr+ time frame for allowing cost-averaging during a full market cycle.
10. There's also no guarantee that such risky funds will generate high returns always.
2. As per Sebi, a small-cap fund will invest 65% min. (100% max.) in small-cap stocks, while the rest can be all others like large-cap, mid-cap and debt products, depending on the investment style decided by various AMCs.
3. Also, as per Sebi, small-cap companies are 251st company onwards, in terms of market capitalization as enlisted by Amfi, which is updated every 6 months.
4. Therefore, a small-cap fund's performance is very much dependent on its fund manager's ability to patiently select these small-cap stocks in its portfolio because:-
a) Risk levels in the broader market keep changing,
b) It's his own perception of the individual stock during selection,
c) Various sectors tend to move in different cycles,
d) He has to select from a universe of lesser-known stocks, and
e) He has to withstand redemption pressure from "impatient" investors.
5. A better way to select small-cap funds is higher star ratings and long-term returns among this specific category since these indicate a proven track record and performance history.
6. Choose a fund through peer performance ranking across a common time period, preferably from within the top 25%.
7. As no single fund stays in the top quartile at all times, check how soon it rebounded after slipping, and whether it continued to stay in the top 50% for over a year.
8. Review annually and replace a laggard if it slipped for four quarters in ranking, as the fund manager cannot correct such downfall soon enough.
9. Patiently investing in small-cap funds through SIPs is also preferable, with 5/10-yr+ time frame for allowing cost-averaging during a full market cycle.
10. There's also no guarantee that such risky funds will generate high returns always.