Big bets on small cap funds! Will the category provide bumper returns in 2024?
#ValueResearch's Dhirendra Kumar answers your queries on 'The Mutual Fund Show'. #NDTVProfitLive
#ValueResearch's Dhirendra Kumar answers your queries on 'The Mutual Fund Show'. #NDTVProfitLive
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00:00 flashing on our screens where you can send in your queries if you want to know about this topic
00:05 and want advice from our experts. Today it's all about the small cap funds. Now undoubtedly the
00:13 big theme of 2023 not just in equity markets but as a reflection in mutual funds as well
00:20 has been the craze I would say for small cap mutual funds. Funds which are focusing on
00:27 investments in small cap stocks have been in the headlines, have been the highlight and the reason
00:35 for that is because they seem to have outperformed their peers. The interest grew to such an extent
00:41 that at some point certain fund houses even put a cap on the amount of money you could put in small
00:48 cap mutual funds. Now AUMs in this segment and in mutual funds overall have crossed 50 lakh crore
00:54 rupees in December 2023. The inflow into small cap funds has stood over 41,000 crore rupees as of
01:05 2023. The question is that do you have the right funds in your portfolio? Is it time to re-look at
01:13 this even as market commentary is talking about now moving focus to large cap funds. To speak on
01:20 all of this and more I'm joined now by Direndra Kumar who's founder and CEO of Value Research.
01:25 Direndra great to have you on NDTV Profit. Absolutely superb to talk with you today.
01:31 Let's begin with you know your take and your commentary on the context that we set out in
01:37 the beginning of this show. The growth and growth of and big investments really. The big story of
01:42 small cap funds. Yeah small caps have been a big story and understandably so. They go ballistic
01:51 whenever they do and it has been you know and because the mutual fund has been has become
01:57 accessible now it has caught the imagination of individual investors and most individual investors
02:03 coming to mutual fund are first time investor because of the easy access. Now you can get going
02:09 with you know in about 10 minutes if you have the pan card and if you have the Aadhaar card you are
02:14 ready to go. So you know and investors chase recent past performance and most investors don't understand
02:23 how it works. So it has caught every individual investor's imagination. It has done exceedingly
02:31 well and most investors are following it and the good thing is the bad thing is that they are not
02:38 they are doing it thoughtlessly. The good thing is that most of the money is coming by way of SIP.
02:44 So my understanding is that investing in small cap is risky. They fall freely whenever the market
02:50 turns around. But you know if anybody is doing with a two three to five years time frame if
02:57 anybody is doing SIP and even if he's doing and he's investing in small cap the riskiest category
03:02 one can think of today you will still get back home much much better off. Yeah you know just to
03:11 give context to something that you've described as a craze Dhirendra. In December small cap funds
03:17 added about 935,000 folios that is more than one third of total folio additions across equity funds
03:27 which is at its all-time high as well. So that risk factor you're talking about is not something
03:35 that investors are looking at at all. In terms of a proportion of your portfolio what should be
03:43 the percentage of small cap funds? What is the kind of weightage that they should have
03:48 in your portfolio? Do you think this is the right time to re-look at some of those investments or
03:54 is this something that you should just let be? For any new investor it should not be in fact any
04:02 new investor should never invest in a small cap fund because it is a very you know it's a very
04:08 risky day. It is not that they are risky it is just that you know they go up and down so
04:14 dramatically that one any investor new to the market is not used to it is not prepared for it.
04:20 So I think it is always good to start on a steadier take something which goes up steadily
04:26 does not fall freely and you know it helps inspire confidence and it on one side of the story people
04:34 are fine with it but you know the the other side the fall people are not prepared for it. So I would
04:40 say that most new investors should avoid in fact most new investors should be even more you know
04:44 they should not be into an all equity vehicle. Everybody should start with an aggressive hybrid
04:48 fund which has a 25 to 30 percent into fixed income and they don't get they don't get unnerved
04:55 by the kind of you know a day like today and somebody who came in a week back or a month back
05:02 he will be getting scared. One can also assume that a lot of people who are watching us right
05:10 now and watching this show Dharendra might not be people who've come in a month back or a week
05:16 back they've been around and they've seen I mean I was looking at your rating of the you know your
05:21 ranking I would say of the top performing small cap funds and we've been putting those details
05:26 on a one-year return on screen as well you're looking at 65-70 percent returns close to 70-67
05:33 percent returns and even if you compare that with your top of the line large cap funds or even your
05:42 blue chips this is streets ahead. Now someone who has seen that kind of return what should they do
05:52 at this point? You know if you have been able to ride this this surge then you need to do nothing
06:00 if you're still if you're going to hang around for another four five years and you will you have
06:04 seen this surge you should do nothing rather continue with your SIP don't stop it because
06:10 this is the time when most people it's a unnerving thing only for the new investor.
06:15 I don't have any doubt that many of these small caps despite the risk despite the blow-up in fact
06:21 my understanding is that you know 25 percent of the companies in these small cap funds
06:25 will not exist will blow up you know they will they will not survive but despite that the 75
06:31 percent which will survive or will exist of which 10 percent of them will be blockbuster and that's
06:38 with that will more than make up for that so this is where and I think the small cap story
06:42 the case for mutual fund is even stronger because when as an individual investor I go to invest in
06:49 small cap or the dicey cap or you know something which is questionable or the most speculative
06:54 segment of the market I end up you know without any checks and balances I end up with a concentrated
07:00 portfolio I end up with a set of companies without any validation when you invest in a fund you there
07:06 is a certain you know I'm not saying that all funds are brilliant in fact the you know if you
07:11 look at the last one year performance of the small cap fund the two funds on top happens to be the
07:17 small cap index fund so so I would say that you know many of these funds will do exceptionally
07:23 well despite going wrong with a part of it so the case for diversification or the merit of
07:29 diversification and the merit of basic validation before you invest in a small cap company
07:36 comes in very handy and actually it has been able to build a very strong case if you look at 20 year
07:40 performance the return compare you know I'm not talking of one year two year five year ten year
07:46 fifteen year I'm talking of 20 year the index return on a 20 year basis of the small cap index
07:51 is is you know is is so significantly ahead of the mainstream large cap index that I really
08:01 wonder that it has taken so long for it to actually be well you know become popular and
08:06 well on its way to become a mainstream investment. Another question which comes to the fore
08:13 is often the kind of investments that small cap funds make and when there's negative news flow
08:21 around these companies I won't take names but a few that you know have been talked about in
08:26 the context of the amount of mutual fund investments in these counters and that becomes
08:33 the eye of the storm or the focus that what is the due diligence that these fund managers are
08:40 looking at is that path for the course though Dhirendra if you're investing in a small cap fund
08:45 you have to assume that you're taking that risk? You are taking a risk when you are investing in
08:51 equity one should never forget the statutory disclaimer that they are all subject to market
08:56 risk they are also subject to you know wrong judgment or you know the wrong judge or the or
09:01 the you know poor judgment it's you are able to figure out only with hindsight it is all being
09:09 you know and so I really wonder that you know despite all the risk of small cap investing in
09:15 a small cap fund reduces your risk substantially because of the basic diligence because of the
09:21 diversification because of your SIP it is nearly impossible for a person to be doing a
09:26 five two thousand five hundred rupee five thousand rupee SIP in a bunch of you know in a in something
09:31 like 250 small cap stocks but here you can do it and if you have this time frame if you are
09:39 venturesome and you just need to be through one full market cycle to really understand what this
09:46 whole thing is all about because they are very risky they are extremely volatile but they are
09:52 also rewarding despite all the risk and you know as I said that 25 percent of the companies in this
09:58 universe will disappear and 25 percent of these companies of the companies in these portfolios
10:04 will be blockbuster and that the companies which will be blockbuster you know the ones which will
10:10 be multi-baggers they are the ones which will actually more than make up for all the all the
10:15 losses so and that is what equity investing is all about it is not about that particular name
10:20 in fact the name the name calling in a specific fund that he bought that or you did this or he did
10:26 that that is the whole point of investing in a mutual fund that you don't bother about those
10:30 individual cases broadly the fund has to do well look at the worst performing small cap fund
10:36 over any five year period in fact if you do the SIP look at the SIP return of the small cap fund
10:44 it really would have made so many Indians wealthy yeah yeah you know this entire
10:53 theme has been about how the large caps is where you will see alpha where you will see value
11:02 would you recommend and you know for viewers who are watching this and wondering what to do with
11:07 this information would you recommend a reallocation of resources to more larger cap funds
11:14 I would say that you know investors should really chalk out a course for themselves chalk
11:19 out a course for yourself based on your experience your scale of investment and I would like to
11:26 really give a very simple a simplistic prescription that and which will fit in for most people
11:32 if you are a new investor and have started investing consider a aggressive hybrid fund
11:39 because the equity component of 75 percent will be multi-cap 10 15 percent of it will be
11:45 will be small cap that is fine if you have been in the market for one or two years consider a flexi
11:51 cap fund or a multi-cap fund it will have 25 small cap but it will not be all small cap and once you
11:58 have gotten used to the market's madness over the next of over two three years then you can choose
12:06 your small cap allocation of your choice you can well have 100 small cap you can have 50 small cap
12:12 you have 25 small cap because the risk of small cap is not small cap the risk of small cap is your
12:18 own behavior when small caps go down by 70 percent in three months time as it happened in 2008
12:25 you will run for cover at the most inopportune time and stricking around at those points
12:32 carrying on at those points hanging around with those investments and also making more investments
12:37 at though in those lows is the secret of success and that takes many years to get used to it and
12:44 capitalize on such opportunity and it is nearly impossible for any new investor with less than
12:49 five year experience to do that to do that absolutely we have the durendra kumar with us
12:56 founder and ceo of value research you know when i look at finfluencers online now durendra kumar
13:04 in that sense is the og who is is very very followed on all of his mutual fund advice i
13:11 don't know how he feels about that being called the og finfluencer i'll take a very short break
13:16 and come back and ask him about that and a lot more do you expect does he expect the same kind
13:21 of returns or similar returns on small cap funds through 2024 that and more on the other side of
13:27 this break
13:36 so
13:46 so
13:58 so
14:20 so
14:44 so
15:09 so
15:33 so
15:57 so
16:21 welcome back you're watching the mutual fund show and we're speaking with durendra kumar
16:25 of value research today the topic of conversation is all about the small cap funds which have
16:31 definitely been i think the front runners and the heroes of 2023 with the fantastic returns
16:38 the question is that can this trend continue uh then you know for someone watching right now who's
16:44 already seen significant returns or as you said someone who's coming just about a month ago they
16:50 are going to look at the performance in the last one year and anticipate and expect something
16:56 similar would that be a valid expectation in your view do you think there's enough steam left for
17:02 that kind of a run-up no i i hope that you know there's a likelihood that they will do well and
17:09 expect similar return as you earned as you got in 2000 you know 2023 that looks very unlikely
17:17 it could be more it could be less because you know there have never been a single year
17:20 where the previous calendar year i'm not saying that you know the market mood changes exactly on
17:26 a calendar year change or december or first january to 31st of december but you know i have
17:31 some number in front of me you know 2023 small cap average return is 43 last year the year before
17:39 that was minus 0.06 which was virtually no return and the year before that was 63 and the year
17:46 before that was 30 which means that this has been a blockbuster in a row for four years but the two
17:53 years before that it was nearly about 19 loss you lost 20 of your capital before that it was so there
17:59 has never been a repeat only once you know 2022 2021 and 2020 was strong positive return of 30
18:08 and 63 percent average returns so it's very difficult to anticipate i don't see any you know
18:14 there could be an island of mispricing or overvalued or you know investors fancy you know
18:22 the fancy for these stocks or this this category of funds investors you know even fund managers are
18:27 forced to you know chase them and deploy their money because and when i look at some of the
18:33 numbers you know the largest small cap fund have actively managed small cap fund which is 11 year
18:38 old is about 43 000 crore i would have said that you know even a mid-cap fund of this scale
18:44 will be considered you know too big to too big to succeed but then this also happens to be the
18:51 best performing fund despite having 43 000 crore and a portfolio spread over little over 250 stock
18:58 and it's and going doing great managing risk much better so you know investors will be hit by risk
19:05 if there is a prolonged downturn but if you are investing and if you have five years time
19:11 still five years and you can stick around with a with a fund for with all the big dips
19:16 uh you can hang on but don't have a short-term expectation because
19:20 near term one year two year or six months you could be in for great disappointment if you're
19:28 coming with that time that view in with that time frame in your mind because that is how investors
19:34 have succeeded investors have invested taken off some money it has still grown they have come back
19:40 again uh that may not continue so when you say a short time frame you're talking about the next
19:46 couple of years and that's an important i'm talking of six months to three years you know
19:51 okay so that's that's quite a wide range six months to three years if you're if you're thinking
19:57 you're going to get the same kind of returns that's possibly not going to happen having said
20:02 that uh adrian for those who are watching and you know they'd want a very specific takeaway
20:07 for someone who wants to deploy fresh capital what would be your picks your top preferences
20:15 in the small cap fund category i would like to first list my riders think of five years
20:22 think of sip and at least and uh then invest in one or two or you know any of these funds five
20:29 six of them which i can list for you which is dsp small cap this one this is the oldest of the lot
20:34 among the oldest uh cortex small cap sbi small cap or you know nippon india small cap the erstwhile
20:42 reliance and uh access small cap you know out of favor but it's still very promising so consider
20:50 these five of them what uh do you look at what is the criteria you look at uh dhiren i'm curious
20:57 are you looking simply at returns uh over a fixed amount of time or are there other criteria that
21:04 you're looking at in great detail when you choose what kind of fund is working best because that
21:10 will be also useful to people watching what should they be looking out for well small caps undergo
21:16 much detail much you know intense scrutiny very rigorous evaluation and besides the number because
21:23 you know they should have performed well over a full market cycle you know a down cycle and up
21:29 cycle so you know age comes in very well all the fund that i have listed are over 10 year old
21:34 number one number two uh yeah you know some of them are 20 year old uh besides that we look at
21:43 the continuity of the fund manager because these funds will do very well and they will also do very
21:48 poorly and the ones which will do very poorly in a particular time period the ability of a fund
21:55 manager to stick around with his bunch of stocks for a certain reason and a belief and uh because
22:01 you know i don't and that brings about a huge difference that is where i find that you know
22:06 the nippon india small cap fund which was a struggler which looked like a gone case or a
22:11 write-off not very long back was able to make a comeback with the same portfolio and the and the
22:17 conviction makes a difference so experience conviction understanding and and here as the
22:23 funds are getting larger we are also looking at the breadth of the of the management of the you
22:29 know because it is beyond some of these small cap funds are beyond the ability of one fund manager
22:35 to manage it they need a team because you know they need small cap stocks then require even you
22:40 know our company they require closer scrutiny in terms of because you have to anticipate or you
22:45 have to really be judgmental about a promoter and which too many people are not tracking so
22:51 many of the stocks in some of these portfolios are you know they're just one or two funds own it
22:57 there is quite a novelty in many of these portfolios and it can take a very long time for
23:02 them to fructify so experience and breadth and performance over a full market cycle to summarize
23:10 yeah absolutely i mean great great parameters to keep in mind when looking at small cap funds it
23:16 needs more scrutiny it needs more homework i would say thank you so much uh the range of quantity
23:22 an absolutely pleasure uh having you on the mutual fund show on ndtv profit we hope to see you back
23:27 again uh that's all the time we have uh today on the mutual fund show but stay tuned we have a
23:34 number for you on the screen where you can send your queries which we will get our experts to
23:38 answer thank you for watching but stick around a lot more coming up on the other side on ndtv profit