In the Indian market, small-cap mutual funds have enormous growth potential and frequently beat their large-cap counterparts during bull runs. These funds make investments in businesses that are still in the early stages of growth and have modest market capitalizations, usually around ₹5,000 crore. When looking for the best small cap mutual funds, many investors make crucial errors despite the promise of larger returns. Five typical dangers to steer clear of while selecting small size mutual funds in the Indian market are highlighted in this article.
1. Chasing Recent Top Performers
Financial media and websites frequently include performance tables of small-cap funds that have impressive short-term returns, sometimes surpassing 50–100% in a single year. But it’s a basic error to base investing decisions only on previous results. These extraordinary profits are seldom sustained over longer time periods and usually accompany sector-specific rallies. A fund that is now at the top of the rankings could do very poorly in the upcoming market cycle.
2. Ignoring Volatility and Risk Metrics
Although small size funds are more volatile by nature, many investors fail to consider important risk factors when choosing them. Figures for maximum drawdown, standard deviation, and beta offer important clues about how sharply a fund’s value may change. During market downturns, funds with extreme volatility can cause severe capital loss, sometimes wiping out years’ worth of profits in a few months of correction.
3. Overlooking the Fund Manager’s Expertise
The fund manager’s sector allocation and stock selection skills are critical to the performance of small size funds. Many investors just consider the success of the fund, ignoring the manager’s background and performance history. Finding prospective businesses with solid fundamentals and room to develop is a skill that small cap investors need. Generally speaking, funds run by experts who have demonstrated expertise traversing several market cycles provide better risk-adjusted returns.
4. Disregarding Portfolio Concentration Risks
Certain small-cap funds have portfolios that are extremely concentrated, meaning that they are heavily exposed to a limited number of stocks or industries. Concentration significantly raises risk even if it might improve rewards under advantageous market situations. Many investors participate in funds where the top 10 holdings account for more than 50% of assets without realizing it since they neglect to check the makeup of the portfolio. If there are challenges facing those particular equities or industries, such concentration may result in significant underperformance.
5. Mismatching Investment Horizon
It takes time and patience for small cap funds to reach their full potential. Many investors enter these funds with the intention of withdrawing their money within a year or two. Buying high and selling low are frequently the outcomes of this mismatch between the short investment horizons and the volatility character of small caps. It usually takes at least five to seven years for small-cap investments to stabilize market cycles and produce significant returns over inflation.
Conclusion
Your experience with best multicap mutual funds can be greatly enhanced by avoiding these typical blunders. Prioritize stable long-term track records throughout several market cycles above recent success. Look at risk-adjusted returns instead of performance metrics. Check the experience and investing philosophies of the fund manager to ensure that they work with your goals. Check your portfolio and see if there are any concentration concerns, and if you are adequately diversified.
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