Small Cap Funds Tips: You can get better returns by adopting the right strategies in Small Cap Funds..

Small-cap funds have seen the biggest decline in the Indian stock market in recent months. These funds have not only suffered a huge drop in their value, but liquidity issues have also raised investor concerns. Due to the higher share of small and medium-sized companies in the portfolio of small-cap funds, they are considered more vulnerable to market volatility.

Investing in these funds comes with both risk and opportunity. Recent data shows that small-cap funds recorded an average decline of 7%, the highest compared to other funds. However, amid these challenges, there remains a possibility for investors to get better returns from these funds by adopting the right strategies.

1. Impact of decline on small-cap funds
The Indian stock market declined by 6% in October 2024, with small-cap funds suffering the biggest decline. These funds fell by an average of 7%, while mid-cap funds fell by 6.5% and large-cap funds fell by 6%. According to experts, small-cap funds are more risky as they invest in small and mid-sized companies, which are more vulnerable to market volatility.

2. Liquidity issues and stress assessment

Small-cap funds are facing increasing liquidity issues. According to AMFI's recent stress assessment, the top 15 small-cap funds take an average of 25 days to sell 50% of their portfolio. Nippon India Small Cap Fund took 31 days to complete the process, while SBI Small Cap Fund took 56 days. This lack of liquidity creates fear among investors, especially when the market falls and people start withdrawing their money.

3. Risk management and investment strategies

Managers of small-cap funds use diversification, investing in liquid assets and hedging strategies to reduce risk. Experts recommend long-term investors to invest through SIP (Systematic Investment Plan) as it averages out the market fluctuations. Apart from this, investors should choose quality funds and experienced managers. During market correction, these funds can give better returns.