Small-Cap Funds: Further Room For Growth

As India enters FY24 amidst global uncertainties such as banking crises, higher interest rates, and potential recessions, it stands out as better positioned than its emerging market peers. Furthermore, after a period of underperformance in FY23, Small-Cap funds are showing signs of a resurgence. In the first two months alone, small-cap funds have outperformed both Large-Cap and Mid-Cap dedicated funds, indicating a promising trend.

Looking ahead, the performance of small-cap funds is expected to continue improving due to the slowdown in earnings downgrades for small-cap stocks. The previous year witnessed a significant decline in earnings caused by high inflation and supply chain disruptions. However, as the pace of earning downgrades subsides, we anticipate a shift towards earnings upgrades, providing a strong foundation for the performance of small-cap funds.

The ratio of assets under management (AUM) for large-cap dedicated funds compared to small-cap dedicated funds has risen to 7 per cent by the end of April 2023, up from 6.29 per cent the previous year. Interestingly, when considering the total market capitalisation of small-cap stocks versus large-cap stocks, small-cap stocks represent around 12 per cent. This suggests the potential for increased inflows into small-cap funds as investors seek exposure to this segment. Recent quarters have already witnessed inflows into broader market funds outperforming those into large-cap dedicated funds. 

Historically, small-cap funds have consistently offered better returns than mid-cap and large-cap funds. The five-year rolling average returns of small-cap funds are 17.1 per cent higher than other categories, making them an attractive investment option for investors seeking higher returns.

Investors seeking growth and superior returns should consider adding small-cap funds to their investment portfolios as they navigate the uncertain yet promising landscape of FY24.

Shashikant Singh
Executive Editor