HDFC Small Cap Fund is an open-end fund that invests primarily in small caps. The fund aims to provide long-term capital appreciation by investing at least 65% of assets in small businesses. The fund appeals to investors with a high-risk appetite and long-term investment horizons, typically seven years or more.
Recently, about 93% of small-cap funds have underperformed relative to their benchmarks, including HDFC Small-Cap Fund. This fund has faced challenges in outperforming its benchmark, the Nifty Small-Cap 250 Index. This underperformance is attributed to market volatility, sector allocation, and stock selection strategies. In this article, we will see some tips for investors for investing in this particular fund.
Analysis of Small Cap Funds: Key Performance Indicators
| Scheme Name | NAV (Rs./Unit) | 5-year return (%) |
| HDFC Small Cap Fund Direct – Growth | 152.01 | 30.19 |
| Nippon India Small Cap Fund – Direct Growth | 191.58 | 38.70 |
| Tata Small Cap Fund Direct – Growth | 44.49 | 35.31 |
| Bank of India Small Cap Fund Regular-Growth | 51.52 | 40.06 |
| Quant Small Cap Fund-Growth | 290.02 | 49.94 |
Also, for particularly HDFC Small Cap Fund in April 2024, it gave a return of 4.95% against its benchmark which gave a return of 6.58%.
The main reason for this underperformance is that small-cap funds have become expensive in recent years. This has resulted in investors pausing their investments as a lump sum in this category of funds.
Also, Economic downturns, market volatility, and geopolitical events can negatively impact small-cap stocks, leading to underperformance. These factors can cause investor sentiment to shift, affecting the overall market and specific sectors.
In a similar manner, poor stock selection, timing of trades, and allocation choices can lead to suboptimal performance. Right now, small-cap funds are expensive, which has resulted in an outflow of funds.
Impact on Investors
Knowing how investing in small-cap funds may affect your portfolio is essential. Also, it is important since the new budget makes substantial changes to both the long- and short-term capital gains of investment. Let’s take a look:
Short-term vs. Long-term Implications
In the short term, the underperformance of the HDFC Small Cap Fund can lead to temporary losses and increased volatility, which might concern investors with immediate financial needs. However, small-cap funds require a long horizon such as a minimum of 7 years to yield competitive returns.
Effect on Investment Goals and Portfolio Balance
The underperformance of HDFC mutual funds can impact achieving specific investment goals, such as funding education or retirement. It requires rebalancing the portfolio to maintain the desired asset allocation and risk level.
Tips for Investors for Investing in HDFC Small Cap Fund
Here are the tips that can help investors make an informed decision.
Review Investment Goals
It’s crucial to align your investments with your financial goals and risk tolerance. Start by defining your short-term and long-term objectives, such as buying a house, funding education, or retirement planning.
Diversify Portfolio
Diversification is a crucial strategy to manage risk. By spreading your investments across asset classes (equities, bonds, real estate, etc.) and sectors (technology, healthcare, finance, etc.), you can reduce the impact of poor performance in any single investment.
Monitor Fund Performance
Regularly reviewing your fund’s performance is essential. To gauge its effectiveness, compare the fund’s returns with benchmark and peer funds. Look at key metrics such as Net Asset Value (NAV), annualized, and risk-adjusted returns.
Conclusion
For investors who are willing to take risks, HDFC small-cap funds are an appealing investing option. However, before investing, consider your financial goals and risk appetite to make an informed decision. Also, focus on diversification.