Year-end special: Invest in smallcap mutual funds with a long-term view

Year-end special: Invest in smallcap mutual funds with a long-term view

Several top-performing smallcap mutual fund schemes rewarded investors handsomely in 2016. Their impressive performance was against the backdrop of many doomsday predictions for the sector. Many market pundits have been predicting a sharp correction in smallcap stocks for a while now, however the segment continues to hold on to its own. Those who ignored the advice of shifting money to largecap segment made money on smallcap schemes this year.

Will the much delayed “sharp correction” finally take place in the coming year? Sure, the smallcap segment is highly vulnerable to demonetisation drive initiated by the central government. A lot of companies in this sector lean heavily on cash. The category has been severely hit and the returns have fallen more than any other category.

“The first half of 2017 looks challenging due to the temporary slowdown caused by demonetisation. Complexity is likely to go up further during the initial phase of GST implementation as well. We may see reversion to normalcy only towards end of 2017,” says Vinit Sambre, Vice President and Fund Manager, DSP BlackRock Investment Managers. According to him, investors with a long-term view should continue with their investments in smallcap category and should use the correction due to demonetisation as an opportunity to buy more. Read Full Interview

Also, some stocks are trading at valuations that can’t be justified by fundamentals. These stocks would indeed see a correction in the coming year. However, the smallcap segment would continue to reward long-term investors.

What should investors do in this scenario? First, ignore doomsday predictions and continue with your investment plan. If you are investing in smallcap mutual fund schemes to meet your long-term goals, you should continue with your investments irrespective of the market conditions. You should remember that such lean phase in the market is actually beneficial to long-term investors, who can buy more units during a lean phase.

Flashback 2016: Year-End Special

Two, you should pick a scheme that has a consistent track record. Don’t chase short-term phenomenal performers, always emphasise on long-term performance. If you do not have an appetite to huge volatility, choose a scheme that follows a relatively-conservative investment approach. Such schemes would contain the downsides in markets better.

Top Performing small caps funds 2016

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