Small cap mutual funds can reward patient investors

Short term investments in small caps can be dangerous. Pankaj Tiberwal, fund manager - equity, Kotak Mutual Fund, also said that investors need to understand the characteristics of small cap investing- it is highly volatile but has long-term potential. “This is a core philosophy- you can’t do frequent trading in small caps. No company is always in a growth phase. We have seen stocks which have not done anything for 2-3 years and multiplied 25 times afterwards. So, it is a game of time and patience.” said Pankaj Tibrewal.

Three top fund managers - Vinit Sambre, head-equities, DSP Mutual Fund; Pankaj Tibrewal, fund manager-equity, Kotak Mutual Fund, and Samir Rachh, fund manager, Nippon India Mutual Fund - were talking about small cap investing in the Indian market, at the Morningstar Investment Conference, 2022, in Mumbai. The fund managers said small cap investments are important because they have extreme growth potential. However, they said that investors need to exercise patience in turbulent times and hold on to investment for a longer term.

“Small caps have to be given more time. When a small cap stock falls, we have to think whether we need to buy more or sell it. Sometimes the calls go wrong also. For example, we had invested very early in Eveready. The company had good metrics. The stock gave handsome returns earlier. But at one point, the company went down very badly. But then the stock did very well. So, it is a call and there are chances. One advice that I would give is to use downs to invest more. Our DSP Small Cap Fund was closed for subscription but we opened it in Covid fall because there was opportunity,” said Vinit Sambre, who manages the DSP Small Cap Fund.


The fund managers said that diversification is more important in small cap funds than in large cap schemes. However, there is always a debate on how much diversification is okay in a mutual fund scheme. Nippon India Small Cap Fund holds 147 stocks and Samir Rachh says it is justifiable.

“We have 147 stocks in our portfolio because we can hold on to small cap stocks for a longer time. There are some stocks in our portfolio which fell from a price of Rs 450 to Rs 50, almost 90% wash off. If I had a 5% allocation in a stock like that, the fund gets hit very badly. Concentration has a big advantage but we can’t take that big downside risk on retail investors' money. Small caps have high liquidity costs, high impact, hence you can't get in and get out like blue chip stocks,” said Samir Rachh.