Last Updated on December 29, 2021 at 5:43 pm
After the market crash in March 2020, SBI Small Cap and DSP Small Cap funds opened for lump sum purchase. Now SBI Small Cap Fund has announced that it will not accept lump sum investments from Sep 7th (it had opened on March 30th). Does this mean investors should be wary of poor returns in the immediate future and book profits from their small cap funds?
First, we refer the uninitiated reader to our previous study Why a SIP in Small Cap Mutual Funds is a waste of money and time. Although we firmly believe there is no need for an exclusive small cap fund for retail investors, those who invest in these are better off with tactical entry and exit rather than a simple SIP.
Tactical exits are for reducing risk and frustrating periods of poor returns and not for enhancing returns. We have earlier used a double moving average indicator that works well for equity, gold and gilts and shall use the same to answer the titular question. See: (1) Is this a good time to buy gold? A tactical buying strategy for gold (2) This “buy high, sell low” market timing strategy surprisingly works! (3) Do not use SIPs for Small Cap Mutual Funds: Try this instead! (4) Can we get better returns by timing entry & exit from gilt mutual funds?
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Before we proceed some context on the decision by SBI to limit lump sum in its small cap funds is necessary. In our SBI small cap review, we had pointed out that SBI Small and Midcap Fund was converted to a small cap fund from May 15th 2018. Earlier it defined small cap as the bottom 100/500 in terms of market cap and could invest between 50 -70% in small caps.
It also had a capacity constraint clause of 750 crores. As a result, the scheme closed for subscription in October 2015 and re-opened via SIP route only since May 2018 but still able to mobilize significant AUM. The scheme can now invest 65-100% in small caps defined as bottom 250 stocks in terms of market cap. The benchmark for the fund remains the S&P BSE Small Cap Index. The fund has a good track record.
From an AUM of 2703 Crores in March 2020, the AUM increased to 4270 Crores in July-end thanks to inflows and market movement. The AUM is now likely to be above Rs. 5000 crores triggering the announcement.
Is it time to book profits from Small Cap Mutual Funds?
We shall use the moving average tactical buy/sell tool to answer this question. Before we proceed any further, investors would need to exercise due diligence while using such indicators. When used in real-time they may not always work (reduce risk as intended) and we would know only in hindsight. Moving averages suffer from whipsaw. That is buy/sell indicators can fluctuate in quick succession. Under such circumstances, the investors will have to use their own discretion. This author will not take any responsibility for any gains or losses that may arise from observations or recommendations made in this article or any other part of the site.
This is the six (6mma) and twelve (12mma) month moving average of monthly SBI Small Cap Fund Direct Plan NAV with the dotted line showing when the 6mma was greater than the 12mma with a value of one (buy signal). Results for your small cap fund would vary. You can use any fund or index and change the moving average duration using the above tool.
Notice that although the NAV is well above both averages, the 6MMA and 12 MMA have been crossing each other (whipsaw) for the last year or so. Also, notice that the NAV was above both averages when the dotted line was = 1 (buy signal).
Currently, the dotted line =0 or 6 MMA < 12 MMA which is a sell signal (see links above examples and explanation). Thus investors should expect a period of poor returns in the coming months. Which is not a great discovery considering the poor GDP growth numbers and difficulties faced by small businesses. SBI’s decision to stop lump sum does seem like a smart move.
Investors sitting on good profits after the recovery can consider booking profits to the extent they are comfortable if they agree that the coming months would be tough in the small cap space. If you are investing via SIP, then consider the benefits of tactical exits while continuing the SIP.
Critics of tactical asset allocation justifiably deride the arbitrary nature of choosing the monthly average tenure (6,12). However, their criticism is with respect to the hope of getting higher returns. This is true, tactical asset allocation should not be implemented with this hope. It is lower risk and in this case, stress.
The prospect of lower risk varies with change in moving average duration but does not vanish. Too low a duration for computing average then whipsaw increases and it is impractical to use. Too high a duration then all information is averaged out. Although there is no Goldilocks number, some number neither too high nor low would reasonably reduce risk.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)