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    Best small cap mutual funds to invest in 2020

    Synopsis

    L&T Emerging Business Fund has been in the third quartile of the performance chart for the last four months. We are watching the performance of the scheme closely and we will update you next month.

    iStock
    Here is the monthly update on our recommended small cap mutual fund schemes for July. There are no changes in the list. You may continue with your investments in these schemes, or start new investments in them to take care of your long-term financial goals.

    Please note that L&T Emerging Business Fund continues to be in the third quartile for the last four months. We are closely watching the performance of the scheme. We will update you on its performance in our review in the next month. We update our recommendation lists every month.

    Sebi guidelines mandates small cap mutual fund schemes to invest at least 65 per cent of their corpus in very small companies. Sebi has defined small companies as companies that are ranked below 250 in the stock exchange in terms of market capitalisation.

    Things You should consider
    • Annualized Return
      for 3 year: 3.05%
    • Suggested Investment
      Horizon: >3 years
    • Time taken to double
      money: 2.7 Years
    Things You should consider
    • Annualized Return
      for 3 year: 4.38%
    • Suggested Investment
      Horizon: >3 years
    • Time taken to double
      money: 3.5 Years
    Because of their investment universe, small cap mutual fund schemes can be extremely risky. Small cap stocks suffer the most during a sharp decline in the stock market or on the face of the slightest bouts of volatility. That is why these schemes are recommended only to investors with a capacity to take very high risk and tolerate volatility.

    Small cap mutual fund schemes have the potential to offer superior returns over a long period. This is because small cap schemes bet on small companies with a very high growth potential. When a small company becomes a very large company, the shares of the company would appreciate multiple times. To put it simply, small cap stocks can be the coveted multibaggers every investor dreams of owning.

    If you are an aggressive investor with a very long investment horizon, you can bet on small cap schemes to achieve your long-term financial goals. A word of caution: sharp falls or prolonged periods of volatility may test your patience, but continue with your regular investments to create wealth over a long period.

    If you are a new investor and do not understand much about investing in mutual funds, it is better to stay away from small cap mutual fund schemes.

    Do not get into these schemes only for great returns in the short-term. That is a sure way to lose money. Choose small cap mutual fund schemes if you have a long-term investment horizon and a high risk appetite. Continue with your investments or hold them for a long term to earn big returns.

    Here are our handpicked small cap schemes for you.

    Best small cap mutual funds to invest in 2020

    If you are keen to know about our methodology, scroll down to read it.

    Our methodology:
    ETMutualFunds.com has employed the following parameters for shortlisting the Equity mutual fund schemes.

    1. Mean rolling returns: Rolled daily for the last three years.

    2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
    i) When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
    ii) When H <0.5, the series is said to be mean reverting.
    iii) When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

    3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
    X =Returns below zero
    Y = Sum of all squares of X
    Z = Y/number of days taken for computing the ratio
    Downside risk = Square root of Z

    4. Outperformance: It is measured by Jensen's Alpha for the last three years. Jensen's Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.

    Average returns generated by the MF Scheme =
    [Risk Free Rate + Beta of the MF Scheme * {(Average return of the index - Risk Free Rate}

    5. Asset size: For Equity funds, the threshold asset size is Rs 50 crore

    (Disclaimer: past performance is no guarantee for future performance.)

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    10 Comments on this Story

    Tarun Garg41 days ago
    sbi is the best
    N S110 days ago
    hdfc and LnT are useless
    Bijul Desai131 days ago
    HDFC small cap has lost its direction ....apart from current crash ...HDFC small cap performance is poor compare to it's peers
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