Small-cap stocks have shown strong performance during the current year. The BSE Small-cap Index crossed 13,000 intra-day on Monday, and is inching close to its all-time high of 13,975 that it touched on January 7, 2008. The index has given nearly 11 per cent return since January 1, 2016, when it stood at 11,940. This is against a modest 7.4 per cent return given by the Sensex year-to-date.
The continued rise in small cap stocks have resulted in mutual funds with large exposure to small-cap stocks giving good returns to investors. However, if you are invested in such funds, what should be your investment strategy? Should you remain invested, switch to funds likely to have less volatility or book profits?
Anil Rego, CEO and Founder, Right Horizons, suggests booking partial profits at this point. “Investors should be cautious in such markets. Ideally, one should book profits in small amount in phased manner and partly move them into mid-and large-cap funds. Currently the PE of this index is 90.66x, which we feel, is unstainable in the long run. In case of a large market fall, it will be impacted significantly,” Rego told FeMoney.
He suggests adoption of systematic transfer plan (STP) if one is keen on continuing with small-cap funds. “The common investor should assess the risk and take calls. If one is heavily exposed to these funds, we would recommend to do partial profit booking and reinvest via STP mode in the same funds. This helps in reducing the downside risk; however, if markets move up further, the portfolio may not get the benefit of it in the short run.
Following are Anil Rego’s 5 fund picks in the small cap space:
Experts also suggest that one should invest in mutual funds that have large small-cap exposure through systematic investment plans (SIPs) to guard against volatility. “Small-cap funds are the most volatile of schemes. The best way to add incremental investments into these such schemes is through the Systematic Investment Plan route. This gives investors twin benefits of the Power of Compounding and Rupee Cost Averaging,” Ajit Narasimhan, General Manager, Category Management, BankBazaar.com, said.
On taking fresh exposure at this point, Narasimhan says only those investors with a longer-term perspective should put in new money. “It is s very important for investors to have a long investment horizon while investing in small-cap schemes. Enter small cap schemes only if you have an investment horizon of at least 5 years,” he said.