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Should I invest in a small-cap fund for my new born baby?

Dhirendra Kumar discusses the suitability of small-cap funds for investments meant for the higher education of a child

I've just been blessed with a baby boy and I want to invest Rs 5000 per month in small-cap funds for his higher education. Is this the right choice or should I get into multi-cap funds?
- Vinod

It could be the right choice. For this kind of goal, i.e. with a time horizon of 18-20 years, by all means invest in a small-cap fund. But small-cap-fund-investing requires periodic reviews. Every two to three years, you should look back and be watchful of fund manager changes. In such a case, be prepared to get out of the fund.

This is important because in the case of small-cap funds, I feel that 90 per cent of the performance of the fund can be attributed to the fund manager as compared to maybe 40 per cent in case of a large-cap fund's manager. This is because the whole large-cap universe is so well defined. A large-cap fund manager has to only look at the universe of some 70-80 companies and that is it. In the case of small-cap funds, the fund manager has to identify opportunities by looking at some 2000-odd companies and then putting your money in those companies. All of this can well raise a lot of issues in terms of people scrutinizing their selections. A fund manager at best can only make an estimate about how a company is likely to do. So in that sense, it's a very responsible position managing a small cap fund.

So if you understand all of this and have experience on your side, then by all means consider investing in small-cap funds for your son's higher education.