Are small-cap funds headed for a six or a run-out?

"On the fourth morning (Kolkata Test of 2001), Michael Slater had produced a box of cigars, provocatively sniffing one as if to say, 'This result is so close, I can smell it.'" - Matthew Hayden, Australia cricketer, on the iconic India-Australia Test match in Kolkata, 2001 The exuberance in the Australian cricket dressing room on the eve of conquering their Final Frontier in India is reminiscent of the current upbeat mood among small-cap investors. In 2023 alone, Indian investors pumped in north of Rs 40,000 crore in active small-cap funds. And with good reasons, too. These funds gunned out an impressive 43 per cent returns last year. But to draw lessons from that iconic Kolkata Test, don't count your chickens too early. The all-conquering Australian team learnt it the hard way. At the start of the fourth day, they were romping home to an unprecedented 17th consecutive Test on the trot; they had Team India in a chokehold; they were on the cusp of opening a box of cigars to celebrate capturing their Final Frontier. Until March 14, 2001, day four of the Test. That day, the Aussies' bubbling excitement degenerated to a soul-sapping experience in the steaming cauldron of Eden Gardens, as VVS Laxman and Rahul Dravid ground them down to dust before being memorably spun out by Harbhajan Singh a day later on the inauspicious Ides of March. This astonishing twist in the tale shows that while other sports have higher brutality, nothing can be as unforgiving as Test cricket. Though others can hammer your body, Test cricket can take your soul. Drip by drip. Slow torture. Small-cap investing can be equally unforgiving. It can take away your soul -and your money. That said, the idea of comparing the Kolkata Test to small-cap investing is not to spook investors. Neither to swear them off small-cap funds. It is just to reinforce that we must tread the small-cap universe with humility and caution. Because ignoring them can be as risky as Australian captain Steve Waugh's belligerent decision to force his tiring bowlers to take the field a second consecutive time in the sauna heat of Kolkata. In Waugh's defence, the same team had steamrolled the same Indian team a few days back. Not just that, his artillery had bowled out the opposition on 32 straight occasions in 18-odd months. The confidence in his bowling quartet -comprising Shane Warne and GlennMcGrath

This article was originally published on February 15, 2024.