Small Cap Difficulty

Busted myths


  • High volatility should have favored higher returns through SIP. But no – Sundaram Small Cap and Aditya Birla Small Cap fund both among the most volatile delivered the worst SIP returns. High risk is not equal to high returns.
  • If a fund has 4 continuous good years, it must be good for all times, isn’t it? No – L&T Emerging Business Fund had four good years and then the fund manager changed. The underperformance after the change was enough to negate all the good work done earlier, making it among the worst performer last three years.
  • A fund has to be in the top performers list all the time to make it a long-term star. Not always! SBI Small Cap fund had 2 bad years among 6 but it has the best 5-year performance.
Hexagon Wealth - Small Cap Returns

6 things to learn from this data set:


  1. Studying long-term risk-adjusted returns like the Sharpe Ratio is helpful in identifying good funds.
  2. A good fund manager is critical to the success of the funds. Whenever there is a change, be alert to changes in performance parameters.
  3. Studying only data is not enough, qualitative factors should be taken into consideration to identify consistent performers. Aiming for the number 1 performer is not always possible, and it is better than one accepts this.
  4. Diversification in small-cap sectors helps given the inconsistency in performance.
  5. SIPs work better with well-managed small-cap funds.
  6. Size matters. Larger the corpus, the tougher to outperform.

T. Srikanth Bhagavat

Managing Director & Principal Advisor