Dhirendra Kumar explains the strategy to follow while investing in small-cap funds
Is this the right time to invest in small-cap funds with a horizon of 10 years? How should one go about it - lump sum or SIP?
- Axay Shah
Small-cap funds had a great run in the last year, and in fact, it has also been the best-performing equity fund category. So if one looks at their previous one-year or three-year returns, they look very handsome and compelling. Seeing their recent performance, it seems tough not to invest in them, but we are missing out on the peril of investing in a small-cap fund because they look horrible at the worst of times. Even the finest of small-cap funds fall freely in the case of a market crash, as we saw in 2008 when the small-cap funds went down by 70-75 per cent in value. In contrast, good diversified equity funds were down by 30-40 per cent or perhaps 50 per cent in some cases. 75-80 per cent decline means your Rs 100 gets reduced to Rs 20.
So keep in mind such ups and downs of small-cap funds. If you are fine with such volatility and will be disciplined and regular with your investment for the next 10 years, you can invest in them. Also, one should always make any such investment via SIP. Always be a little regular and steady with your equity investments rather than putting money in a lump sum. More so now, after their recent climb.