- Date : 15/09/2022
- Read: 3 mins
Despite a short-term decline, small cap schemes have the potential to deliver greater returns in the long run. Find out which small cap funds to invest in now!
What are small cap funds? Are they risky investments?
Essentially, these are the schemes that invest in extremely small businesses or their stocks. Such small businesses are likely to experience more ups and downs than the more seasoned businesses in the big and mid cap groups. Small cap schemes are dangerous and volatile for this reason, especially in the short term.
In the small cap market, picking winners is quite a tedious task. A large number of these businesses are well-known. They haven't been studied enough, either. Their management may be dishonest and they may make bold statements that may not hold up. Prices can occasionally rise as a result of management and market participants. These are some of the explanations for why the market unfairly promotes and penalises these businesses.
If these businesses are successful, the market will be interested in buying these stocks, and investors' portfolios will suddenly contain multibaggers. But if they falter, the stocks would suffer greatly. The stocks may completely tank over night.
In conclusion, investing in tiny caps is not for the faint of heart, especially if you are building your mutual fund portfolio from scratch. You'll need to track out successful fund managers with a focus on small-cap stocks. Consider how the schemes performed throughout the market slump as well.
Also Read: How To Compare The Performance Of 2 Mutual Fund Schemes
Best small cap funds to invest in 2022
Here are several small-cap investment opportunities. But keep in mind that you must have a very high risk tolerance and a very lengthy investing horizon.
Also Read: Top 10 Small Cap Mutual Funds That Have Delivered Over 25% CAGR Returns In 3 Years
What are the methods used to determine the best mutual funds?
The following criteria were used to narrow down the equity mutual fund schemes.
1. Average daily rolling returns for the past three years.
2. The Hurst Exponent, H: It is used to determine a fund's consistency over the previous three years. The H exponent represents the unpredictability of a fund's NAV series. Funds with high H often have lower volatility than funds with low H.
I) When H = 0.5, the return series is described as a geometric Brownian time series. This kind of time series is difficult to forecast.
ii) When H = 0, the series is said to be the mean reverting.
iii) When H>0.5, the series is regarded as persistent. The series has a stronger tendency the higher the value of H.
3. Negative return risk: For this metric, we have only taken into account the mutual fund scheme's negative returns.
X =Returns negative values
Y = the sum of all X's squares.
Z = Y / the number of days used to calculate the ratio
Risk reduction: Square root of Z
4. Jensen's Alpha: Overperformance has been measured over the past three years using Jensen's Alpha. Jensen's Alpha compares the risk-adjusted return of a mutual fund scheme to the anticipated market return predicted by the Capital Asset Pricing Model (CAPM). A higher Alpha indicates that the portfolio's performance has outperformed the returns anticipated by the market.
5. Asset size: The minimum asset size for equity funds is 50 crore rupees.
Also read about Best ETF's to invest in 2022
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
What are small cap funds? Are they risky investments?
Essentially, these are the schemes that invest in extremely small businesses or their stocks. Such small businesses are likely to experience more ups and downs than the more seasoned businesses in the big and mid cap groups. Small cap schemes are dangerous and volatile for this reason, especially in the short term.
In the small cap market, picking winners is quite a tedious task. A large number of these businesses are well-known. They haven't been studied enough, either. Their management may be dishonest and they may make bold statements that may not hold up. Prices can occasionally rise as a result of management and market participants. These are some of the explanations for why the market unfairly promotes and penalises these businesses.
If these businesses are successful, the market will be interested in buying these stocks, and investors' portfolios will suddenly contain multibaggers. But if they falter, the stocks would suffer greatly. The stocks may completely tank over night.
In conclusion, investing in tiny caps is not for the faint of heart, especially if you are building your mutual fund portfolio from scratch. You'll need to track out successful fund managers with a focus on small-cap stocks. Consider how the schemes performed throughout the market slump as well.
Also Read: How To Compare The Performance Of 2 Mutual Fund Schemes
Best small cap funds to invest in 2022
Here are several small-cap investment opportunities. But keep in mind that you must have a very high risk tolerance and a very lengthy investing horizon.
Also Read: Top 10 Small Cap Mutual Funds That Have Delivered Over 25% CAGR Returns In 3 Years
What are the methods used to determine the best mutual funds?
The following criteria were used to narrow down the equity mutual fund schemes.
1. Average daily rolling returns for the past three years.
2. The Hurst Exponent, H: It is used to determine a fund's consistency over the previous three years. The H exponent represents the unpredictability of a fund's NAV series. Funds with high H often have lower volatility than funds with low H.
I) When H = 0.5, the return series is described as a geometric Brownian time series. This kind of time series is difficult to forecast.
ii) When H = 0, the series is said to be the mean reverting.
iii) When H>0.5, the series is regarded as persistent. The series has a stronger tendency the higher the value of H.
3. Negative return risk: For this metric, we have only taken into account the mutual fund scheme's negative returns.
X =Returns negative values
Y = the sum of all X's squares.
Z = Y / the number of days used to calculate the ratio
Risk reduction: Square root of Z
4. Jensen's Alpha: Overperformance has been measured over the past three years using Jensen's Alpha. Jensen's Alpha compares the risk-adjusted return of a mutual fund scheme to the anticipated market return predicted by the Capital Asset Pricing Model (CAPM). A higher Alpha indicates that the portfolio's performance has outperformed the returns anticipated by the market.
5. Asset size: The minimum asset size for equity funds is 50 crore rupees.
Also read about Best ETF's to invest in 2022
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
