5-star rated small-cap funds: SIP of ₹10,000 grows over ₹6 lakh in 3 years

According to SEBI, small-cap funds must invest at least 65 per cent of their capital in small-cap companies with a market valuation of less than 5,000 Cr. Small-cap funds can produce greater returns over the long term, but because the risk is also quite high, small-cap stocks will always have significant volatility over the short to medium term. Therefore, to obtain a higher risk-reward ratio, it is preferable to remain invested for more than 5 years in a small-cap fund. Small-cap funds have the potential to produce superior returns over the long term compared to large-cap and mid-cap funds due to the higher growth potential of small-cap companies. Investors with a high-risk appetite should consider starting a SIP in small-cap funds, but their returns may be negatively impacted by a bearish market, an unstable economy, and other significant global factors. As an illustration, let’s look at two small-cap funds that, in addition to being rated 5-stars by Value Research, have turned a monthly SIP of 10,000 into over 6 lakhs in only three years.

Canara Robeco Small Cap Fund – Direct Plan

This fund was introduced on February 15th, 2019, and Value Research has granted it a 5-star rating. As of June 30, 2022, Canara Robeco Small Cap Fund Direct – Growth had assets under management (AUM) of 2,621 Crores, and as of July 29, 2022, the fund’s NAV was 25.28. Canara Robeco Small Cap Fund – Direct Plan has delivered a return of 18.19% in 1 year and since its inception, the fund has generated an average return of 30.82% annually, A monthly SIP of 10,000 would now have grown to 1.28 lakh due to the fund’s 18% return over the course of a year. 

The fund has achieved returns of 40.57 per cent over the past three years, which indicates that a monthly SIP of 10,000 made three years ago would now have grown to around 6.76 lakh. The sector allocation of the fund includes the Financial, Services, Materials, Capital Goods, and Construction industries. The top five holdings for the fund are Schaeffler India Ltd., City Union Bank Ltd., Cera Sanitaryware Ltd., VRL Logistics Ltd., and Grindwell Norton Ltd. The fund has a 0.41 per cent expense ratio and a sharpe ratio that is higher than the category average of 0.89, at 1.34. The fund’s investment in domestic equities is 91.04 per cent, with 4.58 per cent invested in large cap, 21.31 per cent in mid-cap, and 65.15 per cent in small-cap companies.

Bank of India Small Cap Fund – Direct Plan

The fund was established on December 19, 2018, and as of right now, Value Research has awarded it a 5-star rating. Bank of India Small Cap Fund Direct – Growth’s assets under management (AUM) as of June 30, 2022 were valued 294.47 Crores, and as of July 29, 2022, the fund’s NAV was 26.69. Compared to other products in the same category, the fund’s expense ratio is higher at 1.12 per cent. The fund’s returns for the last 1-year are 5.70% and since inception, it has generated 31.42% average annual returns. 

The fund has generated 40.32% return in the last 3 years, which means that a monthly SIP of 10,000 made 3 years ago would now have grown to 6.24 lakh approx. The fund has sector allocation across Capital Goods, Financial, Materials, Chemicals, Automobile industries and the fund’s top 5 holdings are ICICI Bank Ltd., Timken India Ltd., City Union Bank Ltd., KPR Mills Ltd., Jamna Auto Inds. Ltd. The fund has a sharpe ratio of 1.38 compared to the category average of 0.89 which indicates the fund’s performance of generating better risk-adjusted returns in its category. The fund invests in domestic equities to the tune of 92.6 per cent, with 5.86 per cent of that amount invested in large-cap companies, 20.13 per cent in mid-cap stocks, and 66.61 per cent in small-cap stocks.

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