Small cap mutual funds lose 2.96% in a day. Should you worry?

The small cap mutual fund category lost around 2.96% on Tuesday, an analysis of performance by ETMutualFunds showed. The stock market hit an all-time high on Tuesday, but mid cap and small cap segments lost heavily as investors shunned stocks from these segments because of expensive valuations.

The small cap mutual fund category has given an average return of 24.95% in this year so far. The category offered around 26.53% returns in six months. Mutual fund managers and advisors have been cautioning investors about imminent corrections in the small cap segment after the indices soared very high over a short period of time.

There were around 24 schemes in the small cap category. Quant Small Cap Fund lost the most of around 3.95% in the one-day horizon. DSP Small Cap Fund, and Mahindra Manulife Small Cap Fund lost around 3.57%. ITI Small Cap Fund and Bandhan Emerging Businesses Fund lost 3.40%.



UTI Small Cap Fund and ICICI Prudential Smallcap Fund lost around 2.68%. SBI Small Cap Fund lost the least of around 2.15%.

The small cap schemes are benchmarked against Nifty Smallcap 100 - TRI, Nifty Smallcap 250 - TRI, and S&P BSE 250 Small Cap - TRI. Nifty Smallcap 100 - TRI, Nifty Smallcap 250 - TRI, and S&P BSE 250 Small Cap - TRI lost 4.10%, 3.88%, and 3.80% respectively in the one-day horizon.

Except for Quant Small Cap Fund, all small cap schemes lost lower than their benchmarks. Quant Small Cap Fund lost 3.95%, compared to 3.88% by Nifty Smallcap 250 - TRI, its benchmark.

Out of 24 schemes in the small cap category, nine schemes lost around 3% and 15 schemes lost around 2%.

LIC MF Small Cap Fund, the smallest scheme in the category based on assets managed, lost 2.64%. The scheme manages assets amounting to Rs 170.59 crore. However, Nippon India Small Cap Fund, the largest scheme in the category based on assets managed, lost 3.51%. The scheme manages assets of Rs 36,539.54 crore.

Note, the above exercise is not a recommendation. The main purpose of this exercise was just to find out how much small cap schemes lost in the one-day horizon.

One should not make investment or redemption decisions based on the above exercise. One should always choose schemes based on risk appetite, investment horizon and goal.

We considered the regular and growth options.

Small cap schemes invest in very small companies or their stocks. That is why investing in small cap stocks is considered extremely risky. The small cap segment can be extremely volatile in the short term, but they have the potential to offer very high returns over a long period. Small cap schemes are recommended only to aggressive investors with a high-risk appetite and long investment horizon, say, around seven to 10 years. ETMutualFunds do not recommend small cap schemes to new and inexperienced investors.

ETMutualFunds always ask investors to not base their investment decisions on short-term trends in the market. Small cap schemes are notorious for extreme volatility and bear phases. Investors should invest in these schemes with a long investment horizon and ignore short-term trends and losses. They should always remember that these schemes can offer high returns over a long period.

If you are looking for recommendations, see:
Best small cap mutual funds to invest in 2023