Choosing the Right Small-Cap Mutual Fund: SBI Nippon vs Quant Small Cap

Investing in small-cap mutual funds can be a double-edged sword. While the potential for high returns is significant, these funds also come with a higher level of risk. This article explores the performance, consistency, and overall suitability of the SBI Nippon Small Cap Fund and the Quant Small Cap Fund. We'll also discuss the broader implications of choosing small-cap funds and how to construct a well-balanced investment portfolio.

High Risk, High Reward

The small-cap category is inherently high risk and high reward. For those who are willing to tolerate this risk for the potential of substantial gains, the Quant Small Cap Fund presents a compelling option. It offers higher returns compared to index funds but also comes with additional risks.

My Personal Experience

I have been investing in the SBI Small Cap Fund for the past five years. Prior to this, I invested in the reliance small cap fund, which has recently been renamed to SBI Nippon. I recently added the Quant Small Cap Fund to my portfolio but discontinued this due to the availability of an already established small-cap fund in SBI. My move away from the Quant Small Cap Fund was primarily driven by the inclusion of a small-cap fund in SBI and my concern over the SEBI chief's recent announcements on mid-small cap allocations.

Performance Comparison

Here's a performance comparison of the funds I mentioned: Quant Small Cap SBI Small Cap Kotak Small Cap Nippon Small Cap Axis Small Cap HDFC Small Cap

While Quant Small Cap has its merits, my decision leans towards SBI Small Cap due to its consistency. The Nippon Small Cap Fund, on the other hand, is less consistent. However, for performance, SBI Small Cap ranks among the top alongside large-cap, mid-cap, and small-cap funds.

The SBI Nippon Small Cap Fund

The SBI Nippon Small Cap Fund is a dominant player in its category. Despite its massive size, it has not hindered its performance. With annualized returns of 23.87% as of March 29, 2023, it stands out as one of the best performers in the category.

If you had invested Rs 10,000 in the fund ten years ago, today your investment would be worth Rs 1,03,860, representing an annualized return of 26.37%. This is significantly higher than the returns generated by the Nifty Smallcap 250 TRI (Rs 42,560) and the category average (Rs 62,697).

Diversification Strategy

Samir Rachh, the fund manager of the SBI Nippon Small Cap Fund, employs a diversification strategy to manage risk. As of February 2023, his portfolio comprises 167 stocks, compared to the average of 69 for small-cap funds. This large portfolio is necessary due to the fund's Asset Under Management (AUM) of approximately Rs 24,000 crore.

The goal is to spread out the investment across multiple companies to mitigate risk. This approach allows for the identification of winners with lower volatility and delivers a greater risk-adjusted return.

Building a Balanced Investment Portfolio

While investing in small-cap funds can bring significant rewards, it is important to maintain a balanced portfolio. Here are some diversified investment options to consider:

Large Cap Fund: These funds focus on large, established companies with stable earnings and strong market presence. Mid Cap Fund: These funds invest in mid-cap companies, which offer a balance between growth and stability. Small Cap Fund: Small-cap funds invest in smaller, potentially high-growth companies with greater volatility. Flexi Cap or Multi Cap Fund: These funds can invest in all categories, providing flexibility and diversification. Contra or Value Fund: These funds focus on undervalued stocks that have the potential to offer significant gains. International and Commodity Fund: These can be added to diversify the portfolio across geographies and asset classes.

By strategically allocating your investments across these categories, you can create a well-rounded investment portfolio that balances risk and reward.

Conclusion

When choosing between the SBI Nippon Small Cap Fund and the Quant Small Cap Fund, consider your risk tolerance, investment horizon, and the consistency of performance. For a long-term investment strategy, SBI Nippon has shown strong performance and a robust diversification strategy.

Ultimately, a well-diversified portfolio that includes large-cap, mid-cap, and small-cap funds, along with international and commodity funds, can help you achieve your investment goals while minimizing risk.