Small cap funds take the exposure at the lowest end of the market capitalization. Small cap companies include the startups or firms that are in their early stage of development with small revenues. Many successful small cap firms have eventually grown into large cap companies. Since, small cap stocks give high growth potential, companies in their early stage of development, have great scope of higher developments.
|Large cap company||1st to 100th company in terms of full market capitalization|
|Mid cap company||101st to 250th company in terms of full market capitalization|
|Small cap company||251st company onwards in terms of full market capitalization|
Small caps are typically defined as firms with a market capitalization (MC=no of shares issued by the company X market price per share) of less than INR 500 Crore. Their market capitalization is much lower than the large and mid-cap. Many small caps are young firms with substantial growth potential. But, the risk of failure is higher with small cap compared to large and mid-cap.
Many small cap companies serve a niche market with sound consumer demand for their products and services. They also serve emerging industries with the potential for substantial future growth. Small cap firms have the potential to generate good returns. However, the risks involved in it are very high. But, if the investment period of a small cap is high, the risks tend to lower down.
The smallest equities of small caps are micro-cap and nano-cap stocks. Wherein, micro caps are firms with a market cap of INR 100 to 500 Crore and nano-caps are companies with market cap of below INR 100 Crore. BSE small cap Index, have recorded that four out of every 10 stocks have more than 30% increase in their net profits for the fiscal year of 2014-16.
Some of the most emerging small cap companies in India are Indiabulls Real, Just Dial, PNB Gilts, Federal Bank Ltd, Gitanjali Gems Ltd, Indian Cements Ltd, Indian Overseas bank, Oriental Bank of Commerce, PVR Ltd, etc.
Here are some pros and cons of Investing in small-cap funds that will guide you to understand the fund.
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Following are the important factors you need to look at before investing in a small-cap fund:
An investor should do a fair assessment of the funds’ performances for over a period of time. Also, it is suggested to go for a fund that consistently beats its benchmark over 4-5 years, additionally, one should see each period and see if the fund is able to beat the benchmark or not.
It is essential to check the portfolio construction of the scheme that you will be investing in. Since, small-cap is a risky fund, the portfolio of the scheme should have a small portion dedicated to large-caps and also to debt/money market instruments so that it generates regular income.
A fund manager plays an important role in the overall performance of the scheme. A fund manager is responsible for making investment decisions for the fund’s portfolio. So, investors before investing in small-caps should ideally examine past performance of the fund managed by that particular fund manager, especially in the tough market phase.
While choosing the small cap funds to invest, always look at the quality & reputation of the fund house. A fund house with a long-standing record, large Assets Under Management (AUM), star funds or good performing fund etc., is the one to invest in. A fund house should have a strong presence in the industry along with a consistent track record.
As per the Budget 2018 speech, a new Long Term Capital Gains (LTCG) tax on equity oriented Mutual Funds & stocks will be applicable from 1st April. The Finance Bill 2018 was passed by voice vote in Lok Sabha on 14th March 2018. Here’s how new Income Tax changes will impact the equity investments from 1st April 2018.
LTCGs exceeding INR 1 lakh arising from redemption of Mutual Fund units or equities on or after 1st April 2018, will be taxed at 10 percent (plus cess) or at 10.4 percent. Long-term capital gains till INR 1 lakh will be exempt. For example, if you earn INR 3 lakhs in combined long-term capital gains from stocks or Mutual Fund investments in a financial year. The taxable LTCGs will be INR 2 lakh (INR 3 lakh - 1 lakh) and tax liability will be INR 20,000 (10 per cent of INR 2 lakh).
Long-term capital gains are the profit arising from selling or redemption of Equity Funds held more than a year.
If Mutual Fund units are sold before one year of holding, Short Term Capital Gains (STCGs) tax will apply. The STCGs tax has been kept unchanged at 15 percent.
|Equity Schemes||Holding Period||Tax Rate|
|Long Term Capital Gains (LTCG)||More than 1 Year||10% (with no indexation)*****|
|Short Term Capital Gains (STCG)||Less than or equal to a year||15%|
|Tax on Distributed Dividend||-||10%#|
*Gains up to INR 1 lakh are free of tax. Tax at 10% applies to gains above INR 1 lakh. Earlier rate was 0% cost calculated as closing price on Jan 31, 2018. #Dividend tax of 10% + Surcharge 12% + Cess 4% =11.648% Health & Education Cess of 4% introduced. Earlier, education Cess was 3%.
Some of the best performing small cap funds with AUM above 100 Cr are as follows:
Fund NAV Net Assets (Cr) 3 MO (%) 6 MO (%) 1 YR (%) 3 YR (%) 5 YR (%) 2018 (%) SBI Small Cap Fund Growth ₹53.4591
₹2,704 11.4 6.8 7.5 12.4 16.8 -19.6 L&T Emerging Businesses Fund Growth ₹22.683
₹5,985 4.9 -3.3 -7.7 8.1 11.3 -13.7 Aditya Birla Sun Life Small Cap Fund Growth ₹30.3176
₹2,237 0.9 -8.7 -10.7 0.2 7 -22.6 DSP BlackRock Small Cap Fund Growth ₹52.211
₹4,773 5.3 -1.9 -2.5 0.8 8.6 -25.5 Reliance Small Cap Fund Growth ₹38.3001
₹8,114 7.7 -0.9 -4.6 8.6 10.6 -16.7 Franklin India Smaller Companies Fund Growth ₹49.3612
₹7,005 3.7 -5.3 -5.4 2.5 7.5 -17.4 HDFC Small Cap Fund Growth ₹38.726
₹8,845 1.2 -7 -8 9.3 9.7 -8.1 ICICI Prudential Smallcap Fund Growth ₹25.13
₹471 5.2 3.5 8.4 5.2 5.7 -22.4 Kotak Small Cap Fund Growth ₹71.38
₹1,257 9.9 4.9 5.3 5.1 8.7 -17.3 Sundaram Small Cap Fund Growth ₹76.971
₹1,046 9 -2.1 -1.9 0 4.5 -29.2 Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 11 Nov 19
Unlike any investment, small cap funds have its own pros and cons. If you are ready to take such risks and want to invest in small caps, then they are the right arena for you! You should further explore more!
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