Small-Cap Mutual Funds Can Reward Patient Investors

Short-term investments in small caps can be dangerous. Pankaj Tiberwal, Fund Manager – Equities, Kotak Mutual Fund, also said investors need to understand the characteristics of small cap investing – it is highly volatile but has long term potential. “It’s a core philosophy – you can’t trade small caps frequently. No business is always in the growth phase. We have seen stocks that did nothing for 2-3 years and multiplied 25 times after that. So it’s a game of time and patience. says Pankaj Tibrewal.

Three top fund managers – Vinit Sambre, Head of Equities, DSP Mutual Fund; Pankaj Tibrewal, Equity Fund Manager, Kotak Mutual Fund, and Samir Rachh, Fund Manager, Nippon India Mutual Fund – were talking about small cap investing in the Indian market, at the Morningstar Investment Conference 2022 in Mumbai . Fund managers said small-cap investments are important because they have extreme growth potential. However, they said investors need to be patient in turbulent times and hold on to their investments for the longer term.

“We need to give more time to small caps. When a small cap stock falls, we have to ask ourselves whether we should buy more of it or sell it. Sometimes calls go wrong too. For example, we had invested very early in Eveready. The company had good indicators. The stock gave nice returns earlier. But at some point, the business went horribly wrong. But the stock did very well. So it’s a call and chances are. One advice I would give is to use the lows to invest more. Our DSP Small Cap fund was closed to subscription but we opened it in the fall of Covid because there was an opportunity,” said Vinit Sambre, who manages the DSP Small Cap fund.

Fund managers said diversification is more important in small-cap funds than in large-cap plans. However, there is still debate about how much diversification is acceptable in a mutual fund regime. The Nippon India Small Cap Fund holds 147 shares and Samir Rachh says that is justifiable.

“We have 147 stocks in our portfolio because we can hold small cap stocks longer. Some stocks in our portfolio went from a price of Rs 450 to Rs 50, almost 90% elimination. If I had a 5% allocation in a stock like that, the fund would be hit very hard. Concentration has a big advantage, but we can’t take that big downside risk on retail investors’ money. Small caps have high liquidity costs, high impact, so you can’t get in and out like blue chip stocks,” said Samir Rachh.


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