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’.
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.