Top Small-Cap Mutual Funds to Invest in December 2024

The 2023 returns of small-cap mutual funds, which invest in the equities of very small businesses, have exceeded 40.44%. Once more, investors showed interest in small-cap funds in October 2024, bringing in Rs 3,771.97 crore.

Many investors are being forced to recognize that a correction might be imminent due to the recent market volatility and the discussion of the higher values in the small cap category. Managers and advisors of mutual funds claim that although the valuations are high, investors can still make long-term wealth by sticking with small-cap schemes. Many mutual fund advisors believe that investors can still invest in small-cap schemes in a staggered fashion to build wealth over an extended period of time, despite the fact that the small-cap market has experienced significant growth in the last six months.

Very small businesses or their stocks are the focus of small cap schemes. Small cap schemes are required by the Sebi mandate to invest in businesses with market capitalizations under 250. Additionally, at least 65% of the investments made by these plans must be in small-cap companies. Small businesses experience greater ups and downs than well-established businesses in the large and mid-cap sectors. Because of this, it is quite dangerous to invest in small-cap companies; the small-cap market can also be very volatile, particularly in the short term. Because of this, only active investors with a very high risk tolerance and a very long investment horizon are advised to use small-cap plans.

Should put money into small cap funds?

Are you wondering why every body might take a lot threat making an investment in small cap schemes? These schemes additionally have the capacity to provide very excessive returns over an extended period. For example, the small cap category supplied a median go back of 19% over 10 years. However, to pocket such fantastic returns you ought to be organized to take a lot threat and volatility.

It isn’t very smooth to discover winners withinside the small cap segment. Many of those groups are unknown. They also are under-researched. Their control may be unscrupulous and they are able to make large claims that may be bogus. Sometimes the control at the side of marketplace operators can force up prices. These are a number of the motives why the marketplace rewards and punishes those groups disproportionately.

If these companies are successful, the market will chase these stocks and investors will suddenly have multi-baggers in their portfolios. But if the stocks fall, they will be severely penalized. Stocks can become absolute losers overnight.

So, investing in small caps is not an easy task. You need to find a successful fund manager who specializes in small caps. You should also pay attention to how your plan performed during market downturns.

You can invest in these small-cap plans to build wealth over time. To monitor the effectiveness of these plans, subscribe to our monthly updates. For the past 18 months, the Axis Small Cap Fund has been in the third quartile. Prior to that, the scheme had spent two months in the fourth quartile. For the past seven months, the SBI Small Cap Fund has been in the third quartile.

Best small cap funds to invest in December 2024:

• Axis Small Cap Fund
• SBI Small Cap Fund
• Kotak Small Cap Fund
• Nippon India Small Cap Fund

Our approach

The following criteria were used by ETMutualFunds to shortlist the equity mutual fund programs.

1. Average rolling returns: Over the past three years, they have been rolled daily.

2. Over the past three years, consistency: The consistency of a fund is calculated using the Hurst Exponent, H. The randomness of a fund’s NAV series is gauged by the H exponent. In comparison to funds with low H, funds with high H typically show less volatility.

i) The returns are considered to be a geometric Brownian time series when H = 0.5. Forecasting this kind of time series is challenging.

ii) The series is considered to be reverting when H is less than 0.5.

iii) The series is considered persistent when H>0.5. The greater the series’ tendency, the higher the value of H.

3. Downside risk: For this measure, we have only taken into account the mutual fund scheme’s negative returns.

X =Returns below zero

Y = Sum of all squares of X

Z = Y/number of days taken for computing the ratio

Downside risk = Square root of Z

4. Outperformance: Over the past three years, Jensen’s Alpha has been used to measure it. The risk-adjusted return produced by a mutual fund scheme in comparison to the anticipated market return forecasted by the Capital Asset Pricing Model (CAPM) is displayed by Jensen’s Alpha. A higher alpha suggests that the performance of the portfolio has exceeded the market’s expected returns.

The MF Scheme’s average returns are =

[MF Scheme Beta * {(Average return of the index – Risk Free Rate}] + [Risk Free Rate]

5. Asset size: Rs 50 crore is the minimum asset size for equity funds.