If you are an investor in the DSP Small cap fund, you have received an email from the fund house about allowing lumpsum investments. Quite an irony that when the country is locked down, the mutual funds are opening their gates, and that too small cap, no less!
In Feb 2017, the fund had closed all new subscriptions to the fund citing overvalued markets and difficulty in finding relevant opportunities to deploy funds.
Then in late 2018, it opened up for SIPs , STPs and lumpsum with a limit of Rs 2 lakhs.
As per the recent communication, from April 1, 2020, there will be no restrictions at all. You can invest any amount as lumpsum or via SIP.
The fund house believes that after the recent correction in the small cap space, this could be a good time to add investments to this category.
Well, I say, thanks for letting us know.
However, for you the investor, this should not change things much. No reason to throw caution to the winds.
Most important of all, you have to take into account your own goals, risk profile and check if you have the ‘stomach to digest volatility’.
You would remember, that in 2019, a couple of new fund offers in the small cap space also believed that the time was good to start adding.
Then 2020 happened. Most small cap investors feel like they have been ripped off.
Frankly, if that is the feeling you have, then small caps are not for you.
A small cap fund will always be prone to extreme volatility. If you are willing to endure it, you ‘may’ be eligible for the rewards. Never a guarantee though.
In my own experience, most aggressive investors believe they can ride the small caps. Fact is most so called aggressive investors turn aggrieved, too soon . They panic at the first sight of red. They are, in reality, conservative.
Let’s take the example of the fund itself.
DSP Small cap Fund – Cuts like a knife
Here’s a rolling returns analysis of the fund’s returns. The minimum 1 year return is at (minus)67.4%, which happened between Jan 2008 to Jan 2009.
You have to be invested for 5 years plus, ideally 10 years or more, to get rewarded adequately with such an investment.
Wait! What about that 214% in 1 year.
I know. Your eyes are drooling at the thought of getting 214% in just 1 year. My friend, you are clearly going blind. Firstly, that 214% happened between March 2009 and March 2010. The world is a different place since then.
Do you not know what happened in the last 5 years?
A lumpsum investment in the last 5 years in the fund has seen a mere 0.44% CAGR. Basically, if I ignore the interim volatility, your money has gone nowhere in 5 full years. Not complaining, just stating a fact!
In sharp contrast, a monthly SIP is flaunting red with an absolute (minus) 25%. If you invested Rs. 5000 per month, you are now staring at Rs. 2.26 lakhs against an investment of Rs. 3 lakhs. Annualised, this loss is (minus) 11% . Ooh!
This is true with not only the DSP Small cap fund but most small cap funds.
With the numbers above, a small cap fund is ruled out for most investors. They will not have the patience to sit through that kind of a waiting period. They will also constantly question their own decision to the point that they will sell and convert their paper losses to real.
Now, you may still get an itch. ‘Let me put a small amount and see what happens’.
Beware! You are entering the speculative zone. It’s also a useless transaction as a tiny exposure does not make any difference to your overall portfolio. It only adds to the bloat.
Stay safe!
Great post and as always perfectly timed, Vipin! I hope folks heed to your advise or at least correct their mistakes if they’ve already fallen in to the trap.
I think most new investors will inevitably make the mistake of investing in mid and small caps when there’s absolutely no reason for them to do so unless they start investing at a time when the mid and small caps are battered in which case again the recency bias will keep them away (and the maturity). For example, an investor who started investing in 2017 especially towards the end will surely be loaded with mid and small caps even if the advisor begs them not to — just human nature. Same for focused funds which are also highly volatile.
For most investors, a couple of hybrid funds are more than enough. If they are really aggressive then 2 multi cap funds. For the most aggressive of the investors, IMHO, they can go with 2 multi cap and 2 large and mid cap funds (in 70:30 ratios) and be done with it.
I also like having two funds in a single category. If at least one of them does well, you’ll be a bit calmer. If both do well, then you don’t have any complaints. If both does badly, then that’s just pure bad luck and you’ll have to just ride it out.
What would be great is a fund that invests in 50:20:30 or a similar ratio in to N50:NN50:Debt and auto rebalances as soon as there’s a 5% deviance in the ratio and takes absolutely no risk in the debt part of the portfolio. It would be interesting to see if this has better returns compared to an N50 index fund or an average multi cap fund returns. I’ve a feeling this one will definitely have a lower volatility compared to an N50 index fund.
Great to have you back Srikanth. And you have picked up the older thread about this discussion on the fund type you would prefer. As of now, none exists. Hopefully, AMCs will pay heed to it.
>Firstly, that 214% happened between March 2009 and March 2010. The world is a different place since then.
Valid point, Vipin! Just that we are almost where we were in March 2009. So, history may rhyme again.
No sir, we are far from it. http://unovest.co/2020/03/market-crash-trial-by-fire/