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Should I continue investing in small-cap funds?

Dhirendra Kumar explains the risk-reward equation of investing in small-cap funds

Should I continue investing in small-cap funds or get out of it now and enter after the market stabilisation?
- Ashish Mishra

Small caps do very well but they do so after a long period of time and you get rewards for bearing that pain. If you look at the performance of any fund in the small-cap category, ranging from best-performing ones to not-so-good ones, you will find that on a time frame of seven years, it ends up being the best-performing fund. But before that, it proves to be the most painful fund to own and invest in. And you finally get the reward for bearing that pain. In any kind of market fall, these funds are most susceptible to fall freely. Even before this pandemic itself, we saw carnage in the small-cap space. So, I would say that if it is a small part of your investments, then don't worry and continue your SIP.

The real problem of trying to time your investment in these funds lies in the fact that it's very difficult to get the desired returns, as most of the big moves happen when you least expect them. One fine day the small-cap index will be up by 7 per cent and you will look like a loser. So, all the gains actually come in a short span of time, which makes it very difficult for investors to time the investments. If you can do it successfully, by all means, do it but I can tell you based on my long experience that it's very hard to do.

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