A reader says, “Please advise which small cap mutual fund I should include in my portfolio?”
The short answer: There is no need for small cap funds in any investment portfolio! Regular readers are maybe aware of our stance on small cap mutual funds: Why a SIP in Small Cap Mutual Funds is a waste of money and time! A synopsis.
What should investors do about small cap funds?
- Beware of mutual fund sales guys. They would push small cap SIPs with the dream of huge returns
- Avoid Small Cap mutual funds. They are not worth your time and money. For data and arguments, see:
- If you must choose a small cap fund, recognise that beating the small cap index is trivial. Beating the mid cap index or Nifty Next 50 is significantly harder. So this means your money is better off in larger market capitalizations. You can see proof of this in our monthly equity mutual fund screeners.
- At the very least, do not invest in them via SIP. Buy them when NAV is down and sell when they provide enough gains.
- Sell them when any fund in the category closes the fund for a lump sum purchase.
- Or consider using technical indicators like, for instance: Do not use SIPs for Small Cap Mutual Funds: Try this instead!
It is a myth that having more midcaps or small caps will result in higher returns over the long term. Instead of actively managed small cap funds, investors can consider a flexicap fund with a tiny small cap exposure. That is more than enough for most investors. Multicap funds are also unnecessary.