Wealth managers are advising investors keen on looking at battered small cap shares to start systemic investment plans (SIP) in schemes that bet on these shares. Many of the small cap stocks have tumbled 50-70 per cent since January 2018, resulting in their valuations becoming attractive. However, analysts rule out any immediate broad-base revival, with earnings growth showing no signs of recovery. SIPs in small cap mutual fund schemes would help investors to spread their risk over a period of time.
“The sharp drawdown in small cap funds, is a good opportunity to add small cap funds. They can accumulate with a 5-7 years horizon,” says Deepak Challani, head — third party products at Prabhudas Lilladher.
Small cap funds have disappointed investors in the recent past. In the past one year, the category has lost 18.76 per cent, as per data from Value Research. The category has gained 2.2 per cent in the last three years and risen 12.96 per cent in 10 years. The Sensex has lost 2 per cent in the last one year and gained 10.43 per cent in three years. With the S&P BSE Small Cap Index losing 39 per cent from its peak of January 2018, fund managers say there is scope to pick potential winners.
“The selling pressure provides an opportunity for bottom-up stock picking, as this reflects a correction in the valuation multiples rather than any significant reduction in earnings profile for quality companies,” said Navneet Munot, ED, SBI Mutual Fund. “For retail investors, taking exposure via the SIP route is the ideal way to approach the current scenario as it cushions them against any knee jerk reaction in the market.”
A research note by SBI Mutual showed that 83 per cent of the stocks forming part of the S&P BSE Small Cap index are now down more than 30 per cent from their peak prices in the last 18 months. The note said that whenever the small cap index corrects more than 30 per cent, it bounces back strongly and has delivered 20 per cent on a compounded basis over the next three years.
However, distributors believe given that corporate earnings are slow to come back, investors should be in no hurry to invest, and should build their portfolio slowly over a period of time.
Some financial planners said investors should wait for the economic cycle to recover before investing in small caps. “Once you see a consistent recovery through better monthly data for at least two months in segments like auto, cement and flight bookings, you could opt for investments in such funds,” says Jignesh Shah, founder, Capital Advisors.