Best Small Cap Mutual Fund for 2024 in India

pranjal kamra

1 Dec 202306:18

Summary

TLDROver the past year, there has been a significant rally in small-cap mutual funds, attracting substantial inflows. However, concerns are emerging about high valuations and liquidity challenges in small-cap stocks. Fund houses like Tata, Nippon, and SBI have paused new investments in their small-cap funds due to these valuation concerns. The speaker advises caution for fresh investments, highlighting the risk-reward ratio. For diversification and risk management, international funds are recommended as a better option this year. The video also discusses ETF versus fund-of-fund options and their respective benefits and risks.

Takeaways

📈 The small-cap segment has experienced a strong rally over the past year, with significant growth in small-cap mutual fund investments compared to other categories.
🚧 Some fund houses like Tata, Nippon, and SBI have paused fresh investments in their small-cap funds due to the lack of value and high market levels, showing a cautious approach to maintain their reputation.
💡 Investing in small-cap stocks is tricky due to low liquidity and limited free float, which can cause stock prices to soar with small investments, leading to inflated valuations.
💼 It is advised to continue existing SIPs in recommended funds, but fresh lump sum investments in small-cap funds are not recommended at the current levels due to an unfavorable risk-reward ratio.
🛑 The speaker stresses that while small-cap stocks can grow, their high valuations increase the chances of corrections, making new investments risky at this stage.
🔄 Those who have already invested can handle potential market corrections by averaging out their holdings, but fresh investments may not be as favorable.
🌍 For diversification and hedging against poor domestic market performance, an international fund remains a better choice, as it offers exposure to different markets and companies.
⚠️ The international fund is risky and volatile but offers benefits like diversification and hedging. It also acts similarly to a small-cap fund in terms of volatility.
📊 ETF vs Fund of Fund options are available for international funds, with the latter being more convenient for investors without a Demat account, despite slightly higher costs.
📢 The speaker concludes by recommending that investors carefully consider their risk tolerance and investment horizon, especially in light of tax implications and the concentrated nature of certain funds.

Q & A

What has been the trend for small cap investments in the past year according to the transcript?
-The trend for small cap investments has been remarkable, with a significant rally as depicted in the chart mentioned in the transcript.
What challenges are small cap mutual funds facing as per the discussion?
-Small cap mutual funds are facing challenges in managing the rapid influx of investments and deploying the funds productively to generate good returns, especially considering the liquidity constraints and the need for new investment ideas.
Why did Tata Nippon Life PMS close fresh investments in their small cap funds?
-Tata Nippon Life PMS closed fresh investments in their small cap funds to protect the interests of existing investors and maintain the fund's performance, as they felt the current valuations did not present value.
What is the speaker's opinion on the risk-reward ratio for fresh investments in small caps currently?
-The speaker does not find the risk-reward ratio favorable for fresh investments in small caps, suggesting that the chances of a decline are higher when things become expensive.
What advice does the speaker give regarding SIPs in small cap funds if one has been investing for the past one or two years?
-The speaker recommends continuing SIPs in small cap funds without stopping, as there is no need to halt existing investments, especially if they have been profitable.
Why is the speaker not recommending new small cap funds at this level according to the transcript?
-The speaker is not recommending new investments in small cap funds at this level due to concerns about the high valuations and the increased risk without a corresponding favorable reward.
What alternative investment does the speaker suggest for diversification and potential hedge against market downturns?
-The speaker suggests international funds as an alternative for diversification and as a potential hedge against market downturns, offering exposure to different markets and companies.
What are the benefits of investing in an international fund as per the transcript?
-Investing in an international fund offers the benefits of diversification, hedging against country-specific risks, and accessing different market exposures, which can increase the overall portfolio's resilience.
What are the two variants of the Mirae Asset Global Plus Fund discussed in the transcript?
-The two variants of the Mirae Asset Global Plus Fund mentioned are the Direct Plan (ITF) and the Fund of Funds variant, both of which offer different investment options and fee structures.
What is the speaker's view on the liquidity and cost-effectiveness of ETFs compared to mutual funds?
-The speaker views ETFs as more liquid and potentially more cost-effective than mutual funds when considering the total expenses, although they may require more effort to sell.
What is the speaker's strategy for discussing and recommending funds in the video series?
-The speaker plans to discuss and recommend a wide variety of funds, including large cap, multi cap, small cap, and tax-saving ELSS funds, and will address any doubts or comments from the audience in subsequent videos.

Outlines

00:00

📈 Small Cap Investments Boom and Risks

The speaker discusses the significant rally in small cap mutual funds over the past year, as depicted in a chart. Investments in small cap funds have grown rapidly compared to other categories. However, this has led to concerns about the ability of these funds to effectively invest the influx of capital in productive uses that yield good returns. Small cap companies typically have less liquidity and free float, which poses challenges in generating new ideas or bringing liquidity to buy stocks at the right price. The speaker cites the example of Tata Nippon Life PMS, which has stopped fresh investments in its small cap funds due to valuation concerns. The speaker advises caution, suggesting that while small cap funds have delivered high returns, the risk-reward ratio currently does not seem favorable for fresh investments. They recommend continuing with existing SIPs but advise against starting new ones in small cap funds at this level. The speaker also suggests considering diversification into large or mid-cap funds for those seeking higher returns and mentions the benefits of international funds for diversification and hedging against market volatility.

05:02

🌐 International Funds: A Better Choice for Diversification

The speaker elaborates on the benefits of international funds over domestic equity funds, particularly for diversification and hedging purposes. They note that while domestic equity funds offer long-term capital gains benefits, international funds provide exposure to different markets and companies, which can enhance diversification and hedging. The speaker mentions that Mirae Asset Fund and Mirae Asset Fund of Funds are options available for investors, offering both direct and indirect benefits through their structure. They also discuss the tax implications of investing in international funds, noting that while they may not offer the same tax benefits as domestic funds, the potential for higher returns can compensate for this. The speaker concludes by encouraging viewers to subscribe to the channel and turn on notifications to receive updates on upcoming videos discussing balanced and hybrid funds, and to address viewer comments and queries in future videos.

Mindmap

Keywords

💡Small Cap

Small Cap refers to companies with a relatively small market capitalization, typically less than $2 billion. In the context of the video, the speaker discusses the significant rally in small cap mutual funds over the past year, indicating that investments in this category have grown rapidly compared to other categories. The video highlights the challenges faced by small cap funds, such as the difficulty in finding new investment ideas and managing liquidity.

💡Investments

Investments are assets or items acquired with the goal of generating income or appreciation. The video script talks about the increase in investments in small cap mutual funds, suggesting that these funds have attracted more capital due to their potential for higher returns. The speaker also touches upon the strategy of investing in small caps when they are undervalued and how the market dynamics can lead to price appreciation.

💡Liquidity

Liquidity refers to the ease with which an asset can be bought or sold in the market without affecting its price. In the script, the lack of liquidity in small cap companies is mentioned as a challenge. It implies that these companies may have less trading volume, making it harder for funds to buy or sell shares without impacting the stock price significantly.

💡

💡Free Float

Free float represents the number of shares available for trading by the public, excluding shares held by insiders or large shareholders. The script mentions that small cap companies often do not have a large free float, which can contribute to their price volatility and the challenges faced by mutual funds in managing their investments.

💡Valuation

Valuation is the process of determining the current worth of an asset or company. The video discusses the concept of valuation in the context of small cap stocks, suggesting that when stocks become expensive, the chances of them falling increase. The speaker implies that the current valuations in small cap funds might be at a premium, which could be a risk for new investments.

💡Risk-Reward Ratio

The risk-reward ratio is a measure used to assess the potential return of an investment compared to the risk involved. The script indicates that the speaker does not find the risk-reward ratio favorable for fresh investments in small cap funds at the current market levels, suggesting that the potential returns may not justify the risks involved.

💡International Fund

An international fund is a type of mutual fund that invests in a variety of markets and companies outside the investor's home country. The video script mentions international funds as a potential alternative for diversification and hedging against market risks, especially for those looking to balance their portfolio with exposure to different markets and companies.

💡Diversion

In the context of the video, 'diversion' refers to the strategy of spreading investments across different asset classes or markets to reduce risk. The speaker suggests that investors might want to consider diversifying their investments, especially if they are heavily invested in small cap funds, to mitigate potential risks.

💡Mutual Funds

Mutual funds are investment vehicles that pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other assets. The video script discusses various types of mutual funds, including small cap, large cap, and international funds, and how they perform in different market conditions.

💡Hedging

Hedging is a risk management strategy used to protect against potential losses. In the script, the concept of hedging is discussed in the context of using international funds to protect against poor performance in the domestic market, thereby reducing the overall risk of an investment portfolio.

💡Taxation

Taxation refers to the mandatory financial charge levied by a government on workers and businesses. The video script touches upon the tax implications of investing in international funds compared to domestic funds, noting that while international funds may not offer the same tax benefits as domestic equity funds, they can still provide higher returns if invested wisely.

Highlights

Small cap mutual funds have seen a tremendous rally in the past year, outperforming other categories.

Some funds are facing issues with the rapid influx of investments, struggling to deploy the capital productively.

Small cap companies lack liquidity and free float, making it difficult to generate new ideas or bring liquidity to desired stocks.

Investing a small amount in small caps can lead to price surges and value chasing, which can be risky.

Tata Nippon Life PMS and SBI have stopped fresh investments in their small cap funds, citing high valuations.

The speaker respects the decision of these fund houses to protect investors' interests and their reputation.

The speaker does not recommend starting fresh investments in small cap funds due to the current valuations.

For those who have been investing in small caps for the past one or two years, continuing their SIP is recommended.

The speaker suggests that fresh investments should be considered carefully at current market levels.

International funds are recommended as a better choice this year for diversification and potential hedging against market downturns.

The speaker discusses the benefits of international funds, including exposure to different markets and companies.

The Mirae Asset Fund and its ETF variant are highlighted as options for investors, offering diversification and hedging benefits.

The speaker mentions that the Mirae Asset Fund and its ETF variant are available in various variants to suit different investor needs.

The Mirae Asset Fund is described as a concentrated portfolio that offers benefits of hedging and diversification but comes with higher volatility and risk.

The speaker advises that the fund is not suitable for everyone due to its concentrated nature and the associated risks.

The speaker discusses the tax implications of international funds, noting that they do not offer the long-term capital gains benefits like domestic funds.

The speaker concludes by emphasizing the importance of considering risk and valuation before investing in small caps or international funds.