Determining the Best Mutual Fund for High Returns: Small Caps vs Large Caps
Investing in mutual funds can be a strategic choice, especially when the objective is to achieve high returns with a high risk appetite. Two common choices are small cap mutual funds and large cap stocks. When the investment horizon is set at 5 years, which option might be more suitable? Let’s delve deeper into the advantages and risks of both to help you make an informed decision.
Risk Appetite and Investment Horizon
Ajay, you mentioned a 5-year horizon and a high risk appetite. Based on the studies and data available, small cap funds might be more appropriate for achieving higher returns during this period. Analyzing historical performance can shed light on the potential for growth in small cap funds.
Small Cap Mutual Funds
Small cap mutual funds have shown superior performance over a longer term. For a 5-year investment, small cap companies often exhibit strong growth, as they can easily double their turnover compared to large corporations with billions in assets, such as Apple or Google. However, in challenging economic times, small cap companies may struggle due to their limited resources, including cash and experienced manpower, which can lead to volatility.
The Impact of Economic Stability
When the economic environment is stable, small cap companies often outperform large caps. The reason is that small businesses are more nimble and can adapt quickly to changes in market conditions. Conversely, large corporations are slower to respond to shifts due to their size and complexity.
Large Cap Stocks: A Safer but Less Promising Option
Large cap stocks are generally perceived as a safer investment due to their established presence in the market. Nifty rolling returns for a 5-year period highlight that even large cap stocks do not guarantee consistent returns. For instance, checking the Nifty rolling returns for five years reveals that hitting high returns is not a frequent occurrence. Increasing the time horizon to 10 years boosts the probability of achieving high returns, emphasizing the importance of a longer investment horizon.
Historical Performance and Fund Selection
A detailed analysis of various small cap funds, such as those with a 4/5-star rating, reveals impressive returns over a 5-year period. Notably, some funds have achieved returns ranging from 35.2% to 77.82%. When extending the investment period to 10 years, the results are even more favorable, with a 100% success rate in providing high returns. However, it is essential to note that fund selection plays a crucial role. For example, some newer funds like Axis have not yet accumulated 10 years of data, which can be a limitation.
Conclusion: Increasing Time Horizon and Selecting Funds
While small cap mutual funds offer the potential for higher returns, the investment horizon must be extended to mitigate risks. Additionally, careful selection of funds is necessary to ensure optimal performance. In conclusion, investing in small cap mutual funds over a longer period can provide higher returns, but investors should be prepared for potential negative returns in their portfolios. If you find my analysis valuable, please upvote and follow my recommendations for further discussions.
Happy investing!