Small Caps Or Large Caps: Which One Is Better? | The Mutual Fund Show
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00:00Hello, you're watching the Mutual Fund Show.
00:10I'm Tamannaah Namdar.
00:11Today we're talking about small cap funds.
00:14Remember, this is the show where we discuss everything that matters to your mutual fund
00:19investments, what you should do next, and what is happening in the industry.
00:24The spotlight is on small cap funds because they've for long been called the hidden gems
00:30of the stock market.
00:31But if you get the formula wrong, they may also really mess up your portfolio due to
00:36the high risk and volatility associated with them.
00:39But with great risk comes great rewards as well.
00:42For many investors, small cap funds have turned out to be a game changer.
00:47The small cap 250 benchmark has in fact given a return of over 51% in the last 12 months.
00:53But the question is that can the small cap run up continue?
00:59Is it time to revisit your portfolio when it comes to small cap stocks?
01:05Remember, in the last month or so, the benchmark has seen a growth of 7%.
01:11From the beginning of this year, the theme has been that maybe it's a return to large
01:16cap stocks.
01:17Now considering the current scenario in the stock market, should you relook at your small
01:22cap funds?
01:23If you have fresh money to allocate, where should it go?
01:25And is a small cap fund the right destination?
01:28To speak on this and much more, I'm joined today by Rishabh Desai, founder of Rupee with
01:33Rishabh Investment Services, and Shweta Jain, who's the founder of Investography.
01:38Welcome to both of you.
01:39And thank you so much for joining us today on the Mutual Fund Show.
01:42Shweta Jain, let me begin with your take on the topic that we've selected today and the
01:47spotlight that we're putting on small cap funds.
01:49Tell us a story, run its course or much more to go when it comes to small cap funds?
01:56I believe that small cap as a segment is something that you can't ignore.
02:03I don't think it's run its course.
02:05I think it's something that every investor should have as a part, but depends on how
02:11long they can stay invested.
02:13So for me, it's a theme that goes throughout.
02:17Not necessarily as flavor of the day.
02:20And it's something that investors should always beware of or have caution because this is
02:27definitely a very volatile category.
02:29It needs more time.
02:31So I wouldn't say that, you know, it's run its course, but I think it's something that
02:35new investors should be wary about for sure.
02:37And I usually don't recommend that new investors, you know, just start off with small cap funds,
02:43even if it's a small amount, because they do need to experience markets first.
02:48So that would be my take on this.
02:50Okay.
02:51Now, you know, having said that, I think far from ignoring, investors have shown a lot
02:58of love for small cap funds.
03:00The question is, is it too much excitement when it comes to small cap funds right now?
03:04And is it time to temper this?
03:06Rushabh, your take on this?
03:07Hi, Dabata.
03:08Thanks so much for having me on the show.
03:12I more or less agree with what Shweta had to say.
03:15See small cap is, mid-end small caps particularly are mainly for like a long-term wealth creation
03:21process, products, right?
03:24But from the current point of view, you know, let me just give you some data points, you
03:29know, which I found quite interesting.
03:33The money, what you see, which is coming in over the past 12 to 24 months is all thanks
03:39to the past returns.
03:40If you see the 3 to 5 year returns in mid-end small caps, you know, I mean, they have generated
03:45more than 20% CAGR returns.
03:48I mean, in many or in some of the funds, they have generated as high as 25 to 30% compounding
03:54returns.
03:55So, the money, what you see, what is coming in today's market is all thanks to the past
03:59returns.
04:00Now, if you see the price growth from January 2023 to July 2024, the price growth in mid-end
04:09small caps has been, you know, as high as 80 to 90%.
04:13I mean, if I include the month of August, it will be as high as 90 to 100%.
04:21But you know, has the earnings grown in line with the price growth?
04:26My answer is a no.
04:27See, over the past 19-20 months, the EPS of mid-cap 150 index has grown by around 6% in
04:35absolute terms and small cap 250 has grown by around 13.5% to 14%.
04:40So I think this rally, what we are seeing is largely a liquidity led rally in the mid-end
04:47small cap space.
04:48I think, you know, to answer your question, yes, this is a time to taper expectations
04:53down.
04:54This is a time to be more cautious in the mid-end small cap space.
04:58Also, although we cannot predict the market going forward, I mean, you know, markets can
05:04go further up.
05:05But I think, you know, speaking to the underlining facts and figures of the markets is also very
05:09important, Tamanna.
05:10Okay.
05:11So now having said that, you know, and we're showing you the one-year return, we're showing
05:15you outperformance and underperformance compared to the index, the fact is that the index has
05:22in a lot of cases performed better, if not almost at par with most of the funds.
05:29Rishabh, would that be one way to also look at small cap investments?
05:34Look at an index fund?
05:36See, overall, if you see the mid-end small cap index, you know, both the indices are
05:45very expensive today.
05:46So even if, for example, if, I mean, of course, see today, a lot of fund managers say this
05:51is, you know, a cherry picking market.
05:53I don't deny that fact.
05:55But today I am not comfortable putting in a lump sum amount of money in the small cap
05:59space, mainly because it has rallied so substantially high.
06:03I mean, see, if I want investors to expect high returns in small caps, so if someone
06:09is investing in today's market, then of course, keeping expectations low, not even moderate,
06:14I would say a little low is a wise thing to do.
06:18But down the line, I'm sure if the returns don't pan out the way they are, investors
06:23are definitely going to be disappointed.
06:25So number one, lump sum investments, I would put my money and my clients' money in the
06:31large cap space.
06:32But if someone has a longer time horizon, and someone is investing via SIP methodology
06:37on a month-on-month basis, then definitely mid-end small caps can be continued in these
06:41SIP methodology, but not in the lump sum fashion.
06:44Yeah, yeah.
06:45Let me just, you know, get that take with Ms. Jain as well, Shweta Jain also with us
06:50today, just on the fact that, compared to the index, a host of small cap funds is perhaps
06:58not given the kind of return expected for an actively managed investment.
07:03In such a case, going forward, would you say a bet on the index would be more prudent?
07:09Tamana, yes, great question, because we are seeing index funds, whether, you know, started
07:16off with large cap index funds, maybe seven, eight years ago, when this is the question
07:20that we were asking, you know, can fund managers outperform the index, or can we do index funds
07:27and they give us similar returns, or better returns.
07:30So I think there are periods when you will see that fund managers find it quite difficult
07:35to outperform the index as well.
07:38And I think these are periods where we are seeing a huge amount of liquidity in the market,
07:42huge amount of interest in the market.
07:44And pretty much a lot of these stocks are going up, some of them not deserving so.
07:50So fund managers may not outperform the index.
07:55I would definitely say, you know, keep an eye on the fund that you've invested in, if
08:00it, especially if it hasn't outperformed the index, find out the reasons why it hasn't,
08:07see what's keeping you in the scheme as well.
08:09And if it doesn't make sense to you anymore, it's a great time to review that portfolio
08:15and move to better funds, whether it's small cap, it's even a good time, I think, to look
08:20at your portfolio allocations and see if you're heavy on small cap, large cap, and if a revamp
08:26is in order.
08:27Okay, a revamp is in order, in a typical portfolio, Shweta, what would be the percentage that
08:34you would allocate to small cap funds?
08:36So for a new investor, I know this is going to be an unpopular opinion, but for a new
08:42investor, I wouldn't start with any small cap at all, I'd strictly stick to large cap
08:48a year or so into the market, then get into mid and small cap, because they have experienced
08:55a little bit.
08:56However, last two, three years have been very kind to investors, and they have actually
09:01just jumped into small cap, but I think that's a recipe for disaster in the future.
09:07So for sure, small cap does need to be there, but I think not more than 25 to 30% for somebody
09:15whose experience hasn't been too much in the markets, but for a seasoned investor and for
09:20somebody who has a time horizon of seven plus years, and I think that's a good time horizon
09:26for small cap funds, seven plus years, then I think even up to 40%, I would go for somebody
09:32who's quite aggressive and young.
09:35Rishabh, what would be your answer?
09:37Ataman, if someone has a long term time horizon, say seven years and 10 years, around seven
09:42to 10 years, I think I would say 50% in large caps, 25% in mid caps and 25% in small caps
09:48should do the job.
09:50So I mean, rather than going into pure large cap funds, probably 50 to 60% can be allocated
09:55in flexi cap funds because flexi caps are today heavily tilted towards large caps.
10:00So I think 50, 60% towards flexi cap funds and the rest can be divided into mid and small
10:06caps should do the job.
10:08The reason why I feel that, you know, today, mid and small caps cannot be ignored as historically
10:13what we have seen is that, you know, mid and small caps have outperformed large caps over
10:18a longer period of time, right?
10:21And you know, mid and small caps are more of like price momentum products, you know,
10:27so they are always going to outperform in long term compared to the large cap segment.
10:33So I think, you know, if someone is investing via SIP route, not lump sum again today.
10:39So I think of 50, 60% in flexi cap and the rest in mid and small caps can be divided
10:44in equal proportion.
10:45So you know, the advice which we've just heard weighs in perfectly with the first query we're
10:51taking on the show today.
10:52And remember, the best part of the show is that we take your questions and we tell you
10:56where to write in all those numbers on your screen as well, where you can send us your
10:59WhatsApp questions.
11:01But let me start with a question sent in by Ritobroto Mukherjee, aged 22, who asks and
11:09talks about their portfolio, says my portfolio 65% large caps, 20% mid caps and 15% small
11:17cap.
11:18Is this equation good for a long term investment, Rishabh, I'm going to start with you, because
11:23you talked about someone with a seven to 10 year horizon at age 22.
11:26Clearly, Ritobroto's horizon is much longer with a 15% investment in small caps.
11:34Are they being too conservative?
11:36Ataman, first of all, he has superb clarity of thought, you know, he's at the age of 22.
11:43First of all, congratulations to him.
11:45I think the combination is great.
11:48I mean, if he's comfortable with this kind of allocation, and because 65% in large caps
11:55would would kind of help him because he's starting his investment journey.
11:59So I recommend to maintain this allocation 65% large cap, 20% mid cap and 15% small cap.
12:05If he's able to take a little more risk, then, you know, rather than going in pure large
12:10cap products, you know, as I as I mentioned earlier that, you know, invest 60 or 65% in
12:15flexicab and the rest in mid caps, I think because flexicab will flex around, you know,
12:21from time to time as and when the fund manager feels and appropriate calls would be taken
12:25in that product.
12:26I think just stick with this, he should be should he should be quite doing good in the
12:31long term wealth creation journey.
12:33Okay.
12:34Shweta, you think his equation is perfect?
12:39Yeah, I think it's good because though he's only 22, I think he's quite clear on how much
12:47is mid cap and lower on smaller small caps, I'm quite happy with that 65% large cap is
12:52good.
12:53And also the fact that you know, he may be 22, but he may have started his journey maybe
12:57a year ago, maybe a year and a half ago.
13:00If he's just started, even then, if he's already put in money in mid and small, I think it's
13:04absolutely fine.
13:06If he's aware of the volatility and the risks, which I think today's younger investors are
13:12quite well researched, I would be very worried if this was the other way around where 65%
13:18was small cap, and they would have just seen the past track records and invested.
13:22So I'm quite happy with the portfolio.
13:23And I think he can continue with this.
13:27And maybe even increase once he's seeing some bit of bonuses coming in and some bit of increment
13:34coming in, maybe some bit of movement towards the small and mid cap, because his time horizon
13:42does seem to be quite long.
13:44So he could increase that today combined that's 35%.
13:47So maybe could increase that to 40-45% as well over time.
13:52Okay, Sanjeev is writing in to us age 35 saying I'm looking to start an SIP and Nifty 500
13:58Momentum 50 fund.
14:00What's your view on this index fund?
14:02My goal is to make 3 crore rupees in 17 years.
14:06All right, so very specific goal as well.
14:10So by 52 Sanjeev wants 3 crore rupees and is looking to start this SIP.
14:16What is the amount that he needs to put in to make the math work?
14:20And what about this particular index fund they've talked about Nifty 500 Momentum 50
14:24fund?
14:25Swetha, let's start with you.
14:26Yes, so about 3 crores in 17 years is a reasonable target I would say.
14:33And he would need to invest about 45,000 per month, if he assumes a 12% return.
14:39And I think that would do the trick for him.
14:42And for me, the only thing is, make sure that it's a diversified portfolio, you're not sticking
14:48or depending on just one scheme to do this.
14:51So maybe divide this into three or four schemes.
14:55Nifty 500 Momentum 50 is a theme that we're seeing lots of NFOs, quite a few NFOs.
15:03Open as well.
15:04So this is something that I believe would be much broader than your regular Nifty 50.
15:10And I think the data supports the Nifty 500, especially where you're seeing a huge amount
15:17of performance difference from Nifty 50.
15:21So Nifty 50 versus Nifty 500, I think, over the last decade or so, you see a huge amount
15:28of difference in their performance.
15:30So when Nifty 50 has done maybe 23 times, the Nifty 500 has done maybe 30 times.
15:38So while that may be the past data, I would still say, go slow with the Nifty 500 Momentum 50 Index Fund.
15:47This is something that he could start off.
15:49I'm also a fan of index funds and low cost funds.
15:54So I think this is something that he could start off definitely an SIP in.
15:59But like I mentioned, this should be just one of the schemes of his portfolio, not the entire portfolio.
16:06Okay.
16:07So what should the rest of the portfolio look like, Rushabh?
16:10And what do you make of this particular fund that our viewer wants to invest in?
16:15That's the Nifty 500 Momentum 50 Fund.
16:19I actually have a little bit of a different view than what Shraddha had to say.
16:23I think Nifty 500 Momentum 50, just one fund will do the job.
16:27This is a smart beta index.
16:28And I pulled out some very interesting data that on a 10-year daily rolling basis, this particular fund has been very consistent.
16:36It has actually managed to deliver greater than 15% CAGR returns more number of times compared to the traditional Nifty 500 Index Fund.
16:49And this particular smart beta fund has managed to even outbid many of the flexi-cap focus and multi-cap funds.
16:57So I think just following the momentum strategy will do the job.
17:02This particular product will flex very beautifully between different market capitalization.
17:08Some couple of months back, this particular product was heavy on mid and small caps.
17:14Today, it is very heavy around 65% is allocated towards large caps.
17:19So I think just sticking to this one fund will do the job.
17:23I don't think he requires any other fund in his portfolio.
17:27So yeah, this one fund will also do the job that at least will make life simpler for you, if nothing else.
17:34But of course, 17 years is a long time.
17:36So always time to reassess where investments are going.
17:40Just on that note, Rishabh, follow up there.
17:42How often should you reassess your portfolio?
17:47That's a very great question.
17:49I would say at least if someone is investing and created a portfolio today, give at least five to six years.
17:56Because particularly active funds can underperform in five, six years if a fund is value-oriented.
18:05So value-oriented funds can be a little more cyclical.
18:07So give it at least five years.
18:09And then, I mean, of course, see reviewing on a yearly basis is very important.
18:14How your portfolio has grown, whether you are achieving your goal on a regular basis.
18:20I think that's very important.
18:21But in terms of particular funds, whether you should get out of a fund or no, I think give it some more time.
18:26So I think at least five years needs to be given to a quality fund and then decide if the fund is dramatically underperforming.
18:35And, you know, you need to assess with the fund manager or with the AMC and asking them what exactly has gone wrong.
18:43What is the turnaround story and how much time will the fund be able to turn around and go back to its outperformance?
18:49So these are multiple things which an investor should keep in mind.
18:53But at least give it five years, you know, before kicking out a particular fund in one's portfolio.
18:58OK, so review every year, but give a longer rope to a fund performance, five years at least.
19:04That's the advice coming in.
19:05Ravinder has written to us, aged 57, says,
19:09I'm investing a lump sum amount in conservative balanced advantage fund and equity savings hybrid fund.
19:17Is this the right decision?
19:19I'm looking to invest 45 lakh rupees as a lump sum amount.
19:25Shweta, I'll take this question to you first.
19:29Yes, it's an interesting question because a lot of investors, especially who are coming from fixed deposits,
19:38find that the balanced advantage funds are a great route to start investing.
19:43And indeed it is. But my only worry would be that he has the time horizon, which I believe should be at least three years.
19:51Then this is something that he can do.
19:54The schemes can vary, you know, between conservative.
19:58Maybe he could get into one aggressive balanced advantage fund if that suits his profile.
20:04But I think the information is a little too limited for me to recommend because 57 is still young.
20:10He does have a long time to, you know, stay invested.
20:15So I would definitely look at, you know, a good balance between these schemes and also put in some amount in equity.
20:22If he's comfortable or at least over time, say start off with balanced advantage funds now.
20:27But in the next couple of years, get into equity and, you know, make sure that his goal of growth is met.
20:34It also depends on how much his portfolio is, where all it's invested and what is the withdrawal amount he's looking at.
20:41So I think a lot of questions there.
20:43But if he's a new investor or an FT investor and moving to equities or mutual funds now, let me put it that way.
20:51Then, yes, conservative balanced advantage funds, conservative hybrid funds are a great way to start.
20:58OK, so that is a great way to start, Rishabh.
21:01But, you know, since it's a 45 lakh rupee lump sum investment and two funds have been identified,
21:08would you say it's the right decision and see the age of the viewer writing in 57?
21:15Let me put it in this way. Balance advantage funds are a little more aggressive than equity savings fund.
21:21Equity savings funds, of course, can go aggressive.
21:24But I would suggest, you know, if if he has around four years or four to five years of time horizon,
21:32then going into a balanced advantage fund makes more sense.
21:36If he has a little bit of a smaller time horizon, say like probably three years or so,
21:41then going into equity savings funds makes makes more sense.
21:44But both the categories are very beautiful categories.
21:48You know, balanced advantage funds will be a little more aggressive because they will take a little higher exposure in equity compared to equity savings funds.
21:57So I think the investor needs to be very clear of his risk appetite, which he's not mentioned.
22:03I mean, he's he's mentioned conservative, but I wouldn't put balanced advantage actually as a conservative conservative product.
22:09It's more of a moderate risk taker product, a little lower aggressive product.
22:13But, of course, if I have to use equity savings funds from a conservative point of view,
22:19then, of course, I would bet equity savings fund from from from the conservative point.
22:24But balanced advantage products will be a little more aggressive comparatively.
22:28OK. Arvind Rao writes in to us, aged 40, says I've invested in SIP in the quant infrastructure fund,
22:37but the returns have been negative for the last one month. Should I hold or cancel this investment?
22:43Arvind, that's very little patience, isn't it? But having said that, that is the downside.
22:49Swetha, let me come to you first. Having, you know, the downside of a thematic fund is this, that they are slightly more high risk.
22:59Having said that, he's upset with the negative return for the last one month. Is that too small a window?
23:04Should this fund be given more time? Absolutely. I think one month is absolutely no time being given to the fund.
23:11There must be a thought process that he had in mind when he started with this thematic fund, with this infrastructure fund.
23:18And if that has changed, that he doesn't want to take this kind of risk, because in the last one month,
23:24he would have also seen how volatile it has been. And if he's just not comfortable,
23:29I think the returns are secondary. His experience is more important than just this one scheme return.
23:36So I would recommend that he exit if this is giving him sleepless nights.
23:41That has nothing to do with the fund or the time horizon that has been invested in.
23:45It's just the nature of a thematic fund. It will be very, very volatile.
23:49And it will, it might give you negative returns for a period of time before it, you know, suddenly spikes those returns.
23:57But he has to stay invested for that time. So if he's not comfortable with the nature of the scheme, absolutely exit.
24:04But if he's just saying, you know, it has been negative for the last one month.
24:08So I want to exit. His time horizon should at least be seven to 10 years in a thematic fund.
24:14Or he has to get the entry and exit timing. Absolutely right.
24:19Which is why I'm a little wary of thematic funds.
24:22It should never be more than five to 10 percent of your portfolio on the outside.
24:26So this is something that he has to figure out for himself or with his advisor.
24:31This is something that he has to see what he's comfortable with and take a call.
24:37If he has to exit, absolutely no problem. He could exit, but not just because it's been negative for the last one month.
24:43OK, so you need a better reason than that and a little more patience.
24:48I mean, the yardstick broadly that Rishabh talked about was review your portfolio once a year and give a fund at least five years.
24:56But would you give this fund five years, Rishabh? OK, one month is too less.
25:00But on the other end of the spectrum, would you give it five years?
25:05Tamarasi Quant has been able to manage their product exceptionally well.
25:09Today, if you see Quant, it's actually in the top five in most of the categories, particularly for infrastructure funds.
25:16I'm not a very big fan of thematic and sectorial funds, especially he's what I understand he's doing an SIP investment.
25:23So SIP investments may not work well, especially in thematic and sectorial funds,
25:28because thematic and sectorial funds can get very cyclical for a very long period of time.
25:33It can give probably no returns for seven, eight or nine years at a stretch.
25:37So I think, you know, going in lump sum investments, timing it well, you know,
25:43investing when the valuations are probably reasonable or dirt cheap.
25:46Let me put it in that way in terms of sectorial and thematic areas.
25:50I think that is a wise thing to do and booking profits when the valuations are expensive.
25:54I think that is something what I would recommend.
25:56See, today, infrastructure sector, it's trading at a very high premium.
26:01OK, and I'm not surprised the negative returns because there has been so much of liquidity pushing in the sector
26:07and it has given some phenomenal returns over the last two, two and a half years.
26:12So I think he's chosen the wrong time to be in the wrong sector.
26:17I would suggest him to go for a flexi cap fund for SIP methodologies or a focus or a multi cap fund.
26:23I wouldn't bet on a thematic or a sectorial fund today, especially an infrastructure fund for SIP methodology.
26:30OK, so maybe give it some more time, maybe not as long as five years.
26:36All right. That's all the time we have.
26:38Thank you so much, Rushabh and Shweta, for joining us on the show today.
26:42Thank you viewers for tuning in.
26:44And a special thanks to those who write in with their questions.
26:46If you want to reach out to us, that WhatsApp number is on your screen.
26:50But that's all the time we have on the show for today.
26:52Stay tuned. A lot more coming up on the other side on NDTV Profit.