What Are the Top Recommended Small Cap Funds of 2018?
It's currently a bad phase for small and mid-cap companies as many undervalued stocks are lying in the market. However, most investors have a question as what to do with the mutual fund investments? In the shaky market conditions, small-cap funds have to struggle, but they offer wide returns in the long run. Many small-cap funds are running in the market, but only a few are providing potential growth to investors. The top recommended small-cap funds have been provided with details in the article further. First, know about your risk appetite, return requirements, and investment horizon, then only you should invest in any of the funds provided below:
What Are Small-Cap Funds?
Funds which invest in the companies that fall below 250th position in the full market capitalisation are small-cap funds. These companies have more chances of growth than that of mid and large-cap companies. These companies have been selected on the criteria of its capital and equity portfolio.
Who Should Invest in Small-Cap Schemes?
Investors have their own investment and financial requirements. The ones who want a diversified portfolio investing in the equities of small-cap companies should invest in these funds. Small cap funds are ideal for the investors who have an appetite of tolerating a high risk on their principal amount. The investors who have an investment horizon of approximately seven to ten years should invest in such funds. The funds may offer returns of about 15 to 20% to investors, as the stocks may become double or triple of their value in a short span of time.
How to Select Top-Recommended Small Cap Funds?
Small-cap funds are highly volatile and should be recommended only to investors who have a long investment period. Their volatility is reduced by keeping diversification in the portfolio. Thus, the top-recommended funds have been selected on the basis of following points:
1. Past Performance: The past performance of a fund tells that the fund and its management team have the power to provide best returns even in the tough market timings. How they perform in the bearish markets should be considered highly. The past five years’ performance of the funds tell that how they are performing in comparison with their benchmark and category’s average
2. Portfolio Placement: Picking stocks is an art that is performed by the fund managers to provide the best returns to investors. A diversified portfolio offers less risk as compared to the sector-specific portfolio. At the same time, looking for the portfolio turnover ratio is also important because the more, the ratio, the more, the fund manager churns it. So, one should select the funds which have a turnover ratio of below 30 per cent.
However, if a fund has a high turnover ratio, but it is offering overall good returns, then also we can consider those funds. We must know that the strategies and convictions of the fund manager are working for that fund. The high turnover ratio increases the expense cost, so it all depends on the selection procedure of stocks. Therefore, if a fund holds the quality stocks, then it shouldn’t sell them and work on buy and hold approach.
3. Fund Manager’s Expertise: Investing with an experienced fund manager is equally important before selecting any fund. The fund managers play a vital role as they select the stocks, and know when to take the calls for the betterment of fund and its performance. The quality analysis of stocks helps the fund to give a strong performance record.
The funds are evaluated at various ratios which are Sharpe ratio, standard deviation, beta, and alpha. These ratios help the investors to know the returns of funds, the risk associated with it, its sensitivity and ability to make profits.
On all the above parameters, the top recommended small cap funds for the year 2018 are provided below:
SBI Small Cap Fund (G)
Reliance Small Cap Fund (G)
L&T Emerging Businesses Fund (G)
Aditya Birla Sun Life Small cap Fund (G)
The above-listed funds are evaluated on various indicators values which have provided good returns in the past and performed well even in the bearish financial markets. They have beaten their benchmarks as well as category’s average to provide high returns to investors.