The 5 most-popular small-cap funds of the last 12 months

Summary: Our deep dive into 22 actively managed small-cap funds uncovers the ones that investors are rewarding with fresh money, and the ones they’re quietly exiting. The data might surprise you. The biggest funds aren’t necessarily the fastest growers, at least in percentage terms.

In the world of mutual funds, Assets under Management (AuM) is one of the most closely watched numbers. Simply put, AuM represents the total market value of all the investments a fund manages on behalf of its investors. Think of it as the “size” of a fund.

For a mutual fund, its AuM is a reflection of how much confidence investors have placed in it, and how much the market has rewarded (or punished) its past performance.

Importance of AuM

1. Indicator of fund size and stability

A larger AuM usually suggests that more investors trust the fund and its track record. For example, Nippon India Small Cap, with assets of nearly Rs 65,000 crore, is the largest small-cap fund in India. Its size reflects strong investor participation and years of consistent performance.

2. Lower expense ratios

Funds with bigger AuM can benefit from economies of scale, meaning they can spread their fixed costs over a larger base of investors. This often leads to a lower expense ratio, which is great news for investors since costs eat into returns over the long term.

3. Mirror of market sentiment

AuM is also a live pulse of market trends. When markets are rallying and investor participation is high, AuM rises — partly due to rising NAVs and partly due to fresh inflows. Conversely, market corrections and investor redemptions bring it down.

What increases or decreases AuM

There are three big levers that move a fund’s AuM up or down:

• Market performance: If the market rises, the value of the existing portfolio rises, automatically increasing the AuM. A prolonged correction does the opposite.
• Fresh investor flows: When investors pour in new money, AuM climbs,  regardless of market performance.
• Redemptions: When investors exit, AuM falls, even if the NAV is going up.

What the last 12 months tell us about small-cap funds

We looked at 22 actively managed small-cap funds with at least Rs 2,000 crore of assets a year ago and found some interesting trends.

The big growers

• Bandhan Small Cap Fund added nearly Rs 7,000 crore in assets — the highest absolute growth.
• Nippon India Small Cap and Quant Small Cap followed, adding over Rs 4,000 crore and Rs 3,300 crore, respectively.

For those unaware, absolute growth can favour the larger mutual funds because they have a higher base.

So, we also looked at the small-cap funds that grew the fastest in percentage terms.

• Motilal Oswal Small Cap Fund more than doubled its AuM in just one year — from Rs 2,354 crore to Rs 5,263 crore — thanks to its strong relative performance and lower base. In fact, the fund has generated the highest returns in the last 12 months.
• Bandhan Small Cap (92.6 per cent growth in size) and Invesco India Small Cap (51.3 per cent) were the second and third fastest growers in percentage terms. Meanwhile, Tata Small Cap (28.6 per cent) and Edelweiss Small Cap (18.8 per cent) rounded up the top five.

Notice that none of the very large small-cap funds made this percentage-growth leaderboard — which is logical because:
a) Scaling from a large base is hard. Doubling Rs 30,000 crore is very different from doubling Rs 2,000 crore.
b) Investor caution is at play. Many investors avoid putting fresh money in already large small-cap funds, fearing that size may drag down future returns.

The shrinking funds

Interestingly, eight of the 22 funds we studied actually shrank in size over the past 12 months. This shrinkage is largely a reflection of poor small-cap performance over the last year, which triggered redemptions and eroded NAVs. In fact, the overall category contracted by about 6 per cent year-on-year.

Notable funds that shrunk in size include Kotak Small Cap , HSBC Small Cap, DSP Small Cap and Franklin India Small Cap.

Our take

AuM is a powerful lens for investors, as it reveals where investor money is flowing.

When you see funds like Motilal Oswal Small Cap and Bandhan Small Cap rapidly growing, it tells you that investors are rewarding performance and seeking opportunities where the fund manager still has the flexibility to pick nimble small-cap winners.

While as an investor, you should track AuM trends, use them as just one data point. Combine it with performance consistency, portfolio quality and expense ratio before making decisions.

If that sounds like too much work, don’t worry, we’ve done the heavy lifting for you. Our seasoned analysts have put together a carefully curated list of recommended small-cap funds on Value Research Fund Advisor. These are funds that pass our filters for long-term performance, portfolio strength and suitability for retail investors.

If you want your money to be in the right small-cap fund — one that works for your goals and risk appetite — this is where you should start.

Explore Fund Advisor Today

Also read: The 3 most improved small-cap funds of the last 5 years