SIPs in small cap funds attractive

MUMBAI: Wealth managers are advising investors keen on looking at battered small-cap shares to start a Systemic Investment Plan (SIP) in a scheme that bets on these shares.

Many of these shares fell 50-70% since January 2018 resulting in their valuations becoming cheaper but analysts warn against an immediate revival with earnings growth showing no signs of recovery immediately. A SIP in a small-cap mutual fund scheme would help investors spread their risk over a period of time.

“The sharp drawdown in small cap funds, is an good opportunity to add small cap funds. They can accumulate with a 5-7 years horizon,” says Deepak Challani, head– third party products at brokerage Prabhudas Lilladher.

Small Cap funds have disappointed investors in the recent past. In the past one year, the small cap fund category has lost 18.76%, as per data from Value Research. The category has gained 2.2% in the last three years and risen 12.96% in 10 years. The Sensex has lost 2% in the last one year and gained 10.43% in three years

With the S&P BSE Small Cap Index losing 39% from its peak of January 2018, fund managers said there is scope to pick potential winners.

“The selling pressure provides an opportunity for bottom-up stock picking, as this reflects a correction in the valuation multiples rather than any significant reduction in earnings profile for quality companies,” said Navneet Munot, ED and CIO, SBI MF. “For retail investors taking exposure via the SIP route is the ideal way to approach the current scenario as it cushions them against any knee jerk reaction in the market.”

A research note by SBI Mutual showed that 83% of the stocks forming part of the S&P BSE Small cap index are now down more than 30% from their peak prices over the last 18 months. The note said that whenever the small cap index corrects more than 30%, it bounces back strongly and has delivered 20% on a compounded basis over the next three years.

However distributors believe given that corporate earnings are slow to come back, investors should be in no hurry to invest, and should build their portfolio slowly over a period of time.

Some financial planners said investors should wait for a economic cycle recoveryprint Livebefore investing in small caps.

“Once you see a consistent recovery through better monthly data for alteast 2 months in segments like auto, cement and flight bookings, you could opt for investments in such funds,” says Jignesh Shah, Founder, Capital Advisors.


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