This question is becoming increasingly common these days. People are wondering if they should stop their SIPs in small-cap funds.
Small-Cap Funds are high-risk and high-return funds. They invest in listed companies with a comparatively smaller market capitalization and a high growth potential.
In the year 2017 alone, the BSE Small-Cap index gave mind-boggling returns of 60%. In comparison, BSE mid-cap index and Nifty 50 index gave returns of 48% and about 30%.
The potential growth of a small-cap stock is huge. However, at the same time, the risk of volatility is also high.
In case of an adverse event, small-cap stocks demonstrate high volatility. With the stock prices diving down in the blink of an eye, the investor’s money is at high risk in this category.
According to SEBI, those stocks which are listed from the 251st company onwards, in the order of full market capitalization are known as small-cap stocks.
Similarly, large-cap funds are from the 1st -100th and next 150 companies respectively based on full market capitalization.
By nature, small-cap stocks are generally young listed companies with significant growth potential. Due to the above reason, these stocks tend to be more volatile and therefore have a higher risk as compared to mid-cap and large-cap stocks.
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In 2018, the bull period of the previous year led the way for a bear period and all hell broke loose. With falling prices, the investor’s confidence reached an all-time low. Small-cap stocks and mutual funds were affected the most.
This year, the BSE Small-Cap index has fallen from 20,000 points to almost 16,000 points. To categorize this index in % terms, the index has witnessed immense volatility and decreased more than 20% in less than 6 months.
In March 2018, the NIFTY Small-cap index fell from 6.76% to 3.60 %. Moreover, the NIFTY small-cap index P/E has fallen from a 3-digit figure of 110 to 62 in the last 6 months.
While high returns in 2017 have attracted investors to be a part of the small-cap rally, this heavy decline in 2018 is an investor’s worst nightmare.
Historically, small-cap stocks have underperformed whenever a recession has hit the economy
In this scenario, what should a common investor do?
Top small-cap mutual funds such as Reliance Small-cap fund, HDFC Small-cap fund, SBI Small-cap fund, and others have lost their heat and have performed relatively bad.
Which is why it is very common to hear questions like: ‘Should I stop my SIP in Reliance Small Cap Fund? Should I stop my SIP in HDFC Small Cap Fund? Should I stop my SIP in SBI Small-Cap Fund?’
Small-caps, by their very nature, are volatile with a high-risk and high-return trade-off. Recently, the market has been undergoing a bearish phase. Small-cap stocks, in general, have been falling as well.
In order to objectively analyze the scenario, investors must remain invested in small-cap stocks, because it is important to analyze the market downturn as a whole.
With respect to the domestic and global market scenario, the commodity prices in general and crude oil prices, in particular, are volatile and rising. Political uncertainty is prevalent in both domestic and global markets
There is a lot of hue and cry regarding the general elections in 2019, which are less than a year away. The uncertainty over who will form the government is giving rise to investor scepticism. Similarly, uncertainty also prevails in the international economy.
It is expected that the present state of affairs is not likely to change drastically over the next couple of quarters. Therefore, the performance of small-cap mutual funds in the general and small-cap index, in particular, is expected to follow the above suit.
Investors who are not comfortable with the volatility would be better placed to invest their money in large-cap and/ or mid-cap funds in the wake of lower volatility and greater stability. Investors may also consider reducing their risk significantly, by opting for multi-cap funds.
Market corrections are a natural phenomenon and they take place from time to time. When you look at the longer investment horizon, such fluctuations get ironed out and wealth is created for investors. Therefore, investors must not try to time the market and it is suggested that they remain invested for the long haul.
Small-cap mutual funds have historically behaved in a similar manner. In bearish markets, they are the ones to suffer the most.
If you can tolerate the risk, you can choose the option of a Systematic Investment Plan or SIP. It will turn out to be a better option, rather than lump-sum