Small-cap mutual funds have been delivering over 30 per cent returns for the second consecutive year. AMFI data for November shows that small-cap tops the equity mutual fund investment list for the 14th month in a row. Rs 3,611 crore inflow in small-cap mutual funds in November was nearly 12 times more than the inflow of Rs 307 crore in large caps in the same duration. The Nifty smallcap 100 index has risen nearly 53 per cent year to date in the last one year against the benchmark Nifty 50's 18.3 per cent.

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Though small caps are the first to rise and the first to fall because of market fluctuations, the current situation of the share market, where new highs are being achieved every other day, gives the impression of a bright year ahead for small caps.

Mutual fund investment is market-linked, and you can't predict the future of the market, which is influenced by internal as well as external factors.

Amid the backdrop of a bullish share market, where volatility can also be not ruled out, we spoke to a number of experts who told us if it was the best time to invest or if one should restrain themselves and opt for a mixed portfolio?

Here is what they told us-

Chandraprakash Padiyar, Senior Fund Manager, Tata Asset Management

We believe India is at an early phase of its economic growth cycle with the banking sector, real estate, infrastructure investments, corporate capital expenditure, and manufacturing contributing to the positive outlook.

In line with this view, our sense is that the earnings growth outlook for corporate India is likely to be healthy going ahead.

Over the past few years, equity markets have moved higher, specially the mid-cap and small-cap segments, and some consolidation will be very healthy if it happens.

As of now, the momentum is very strong from a flow perspective.         

In balance, we would recommend investors take a long-term view on investing in the small-cap segment and advise them to expect reasonable growth rather than repeating past few years' returns of 30%+.

Next year, we are hoping for some consolidation of returns for the small-cap segment given the sharp move up in recent times.

Ideally, an investor should consider at least a 5-year time horizon on an incremental basis.

Kaustubh Belapurkar, Director, Manager Research, Morningstar Investment Research India Private Limited (formerly known as Morningstar Investment Adviser India Private Limited)
 

Given the recent sharp run up in the market, specially small caps, it is important that investors don’t get exuberant while investing in small caps; stick to your asset allocation and split across various market-cap buckets.

While investing in small caps, investors should come in with realistic expectations and invest regularly through SIPs.

It is very hard to predict the short-term movement in the market.

Given the sharp run up in the small-cap counters, investors need to be prepared to face potential short-term volatility and invest with a horizon of at least 7 to 10 years.

They will need to be patient with small-cap investing and have realistic expectations.

Small caps can be great wealth creators over the longer term, but they can potentially witness large drawdowns over the short term.

Adhil Shetty, CEO, Bankbazaar.com

Small-cap funds are on the verge of completing another calendar year of 30%+ returns. These are extraordinary returns. So it’s a good time to remember that returns can also be cyclic.

Small-caps can also go through periods of underperformance like the calendar years of 2018, 2019, and 2022, and the initial months of 2020.

Small-cap funds invest in companies ranked 251 and above in terms of market capitalisation.

This is the riskiest segment of the market with high volatility, though the potential for great returns can also be seen.

There will be a recency bias for small caps, but it’s worthwhile remembering that when market corrections happen, the riskier asset classes tend to correct the most.

Therefore, it’s best to not be swayed by recent performance but instead consider long-term prospects.

Equity investments require long-term horizons of preferably 3-5 years. But small-cap equity may require an even longer horizon of 5-7 years to account for periods of high volatility.

A longer horizon gives you a much better chance of earning the higher returns you’re taking the higher risks for.

Novice investors should avoid timing the market and let SIPs do their work through high-quality mutual funds.