ENTER SMALL-CAP FUNDS WITH A LONG INVESTMENT HORIZON

Small-cap funds have enjoyed a very good run over the past year. The best performing fund has given a return of 177 per cent, while the category average return stands at 101 per cent (as of June 21, 2021). While investors may still enter these funds despite the massive run-up, they need to observe a few precautions.

- Sudipta Mitu

Sound prospects: Many smaller companies in India are poised to do well because of a number of factors. The Atmanirbhar Bharat programme (aimed at import substitution) and the production-linked incentive scheme are expected to open up new opportunities for smaller, specialized manufacturers within the country. Many countries now want to reduce their dependence on China and are hence looking to reorient their supply chains towards other countries. India has an opportunity to gain from this trend. Much smaller manufacturers in sectors like chemicals, auto ancillaries, and so on could gain from this trend. Those within the capital goods sector could also benefit if there is a revival in private-sector CAPEX, for which the chances seem bright. In many industries, manufacturing units are reaching those limits of capacity utilization where investment in new capacity becomes imperative.

Expensive valuations: The returns over the past year are high. One reason for this is the base effect. The markets had fallen steeply in March 2020, so the current returns look high from that low level.