Should you Invest in Small Cap Funds now?

small cap funds are falling

Investors after seeing the long-term good performance of Small Cap funds saw a sharp correction over the last 2 years. Many of them who invested first time in equity funds are now wondering that if they should exit and move their investments in fixed deposit type of instruments.

While such a situation occured multiple times in the past in an Investment journey in the last 20 year in equity funds, especially with Small cap funds. However, history tells us that after every steep correction it strongly bounced back and made wealth for investors.

Ideally when its get corrected that is the right time to particiapete in them. But, unfortunately that does not happen, investors sway away from them and invest in guaranteed return type of Investments.

We studied the category return and past corrections when it caused huge losses in investors portfolio and shook investors confidence

What did we find? Every time this category has bounced back strongly from the deep correction and made wealth for their investors ( See the chart below of NIFTY Small cap 250 TRI from 1st Jan 2008 to 1st Jan 2020)

is it right time to invest in small cap funds

Apart from this, we also have studied each bear market/ deep correction (20% or more ) closely in the Small-cap Index (NIFTY 250 SMALL CAP TRI) since 2008 and observed how much returns it was able to give from the respective market lows over the next 5 years or 7 years.

You can see there is a good possibility of getting higher returns from deep market corrections

small cap funds corrections

As you can see in the chart above, there were corrections in the past and Small Cap category suffered but every time it has bounced back with strong recovery and provided handsome returns for those who stayed with them for at least 5 years.

The bottomline

While in the last two years, small cap funds have not performed well, but it is a short term correction and such correction has occurred many times in the past and every time it strongly bounced back from such deep correction.

Hence, we think it is the ideal time to start SIP in a small-cap fund which could  enhance your portfolio returns when it will bounce back. Also, you can take the advantage of such corrections by investing lumpsum at discounted prices in those stocks (Small cap fund portfolio) who may be a multibaggers in future.

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