If you have a younger sibling, you might have experienced this. They are extremely sensitive to your behaviour, need double the attention you require from parents and usually think everything happens around them. Small caps are very similar, if not exact. Known to be very sensitive to volatile markets and higher-risk associations, they form a part of the mutual fund industry, which requires maximum monitoring and serious attention. As per SEBI guidelines, these schemes need to invest 80 % of their corpus in small-cap companies with a market capitalisation of Rs. 5000 crore. A simple example of a Quant Small Cap fund can explain these inconsistent returns and risk scenarios.
Gold Rate
Wednesday 12 March 2025
The fund was launched on 15 April 1996 and currently has a corpus of 90,626 Cr. It has been rated as one of the very high-risk funds, with an average annualised one-year return rate of negative 4.34%. However, it recovered and performed exceptionally well when you look at its three-year annualised returns. This shows that you need to have a high-risk tolerance and a long-term investment horizon if you want to enjoy a significant return by investing in a small-cap fund.
Risks in Small-Cap Mutual Funds
Small-cap funds are characterised by steep declines in returns and lengthy periods of recoveries. This risk deters most investors from choosing them. Most people find large caps and mid caps a safer option to invest in due to their stability and steady returns with low risk. These invest in companies which have established themselves in the market with robust business models and are strong enough to deal with negative market conditions.
Smaller companies face greater struggles in all aspects of business, and hence, funds investing in such businesses have the greatest possible risk of volatility. Institutional investors seldom invest in small-cap funds, which creates a liquidity issue and makes it tough to exit the fund. Small-cap companies are often not extensively covered by analysts or even the media. This lack of knowledge makes it difficult to conduct thorough research and makes the prospects even more uncertain.
Key Risk Factors and their Application in the Quant Small Cap Fund
- Risk of Volatile Market
Small-cap stocks belong to companies that are new entrants in the market. With low infrastructure backup, low market capitalisation and inability to access funds, these companies are very sensitive to any micro or macro changes in the economy. Their stocks rise and fall with the slightest changes in the market situation.
To understand the volatility profile of a small-cap fund like Quant Small Cap Fund, let us look at the risk ratios calculated on daily returns for the past 3 years (as of 31st January 2025)
| Risk Ratios | Riskiness | Quant Small Cap Fund | Category Average |
| Standard Deviation: It gives an idea about how volatile fund returns are and a lower value indicates better predictable performance. | High Volatility | 18.82 | 13.08 |
| Beta Value: Shows volatility of the fund’s performance against similar funds in the market. The lower the value, the more stable the performance. | High Volatility | 0.91 | 0.68 |
| Sharpe Ratio: A higher ratio indicates that the fund has given better returns for the risk taken. | Low Risk-Adjusted Returns | 0.82 | 5.82 |
| Jensen’s Alpha: This is an indicator of additional returns generated against the benchmark. | High Risk-Adjusted Returns against Benchmark | 5.16 | 4.97 |
- Risk of Liquidity
Since institutional investors refrain from investing in small-caps due to their riskiness, and for retail investors, the participation is also not significant, trading these stocks is tougher. Hence, it is difficult to disinvest without impacting the price.
Quant Small-cap funds asset allocation includes a 24.11% investment in large-cap and 3.55% in mid-cap. This investment in large-cap funds is a way to derisk the portfolio to manage its liquidity.
- Portfolio Concentration Risk
A concentrated portfolio essentially focuses on a few chosen and researched sectors or assets to invest in the expectation of higher returns. With few assets or sectors to monitor and control, it is easier to manage concentrated investment and make informed decisions. The flip side to it is that such a portfolio is susceptible to increased risk and sector volatility. If a few chosen sectors do not perform well, your entire investment is at stake. You also lose out on the returns that sectors outside your portfolio generated. If you want a balanced approach to risk vs return, diversification is the option. It smoothens your market journey by spreading your risk across sectors and assets, cushioning you from high market fluctuations and helping you take advantage of the market upswings for a better return. But, it does require constant monitoring and research as any underperforming asset or sector can impact your overall returns significantly.
The quant small-cap fund has adopted an aggressive investment strategy as it is constantly on the lookout for new opportunities. It is quick to shift its allocation between sectors and assets as per market caps and can generate a significant alpha for investors, which is a return over the market benchmark.
- Expense Ratio and Cost Impact
This ratio is an indicator of the cost involved in managing your investments and is charged by the mutual fund companies towards administrative and fund management charges. The higher the expense ratio, the lower your net return.
The expense ratio of Quant small-cap fund is 0.68% and is more or less similar to what other funds in the same category charge.
| Fund Name | AUM (Cr) | Expense ratio |
| Quant Small Cap Fund | 22832 | 0.68 |
| Nippon India Small Cap Fund | 57010 | 0.74 |
| Tata Small Cap Fund | 8883 | 0.37 |
| Canara Robeco Small Cap Fund | 11528 | 0.52 |
- Fund Manager’s Strategy and Past Performance
The experience and ability of a fund manager impact returns in any portfolio considerably. They play a crucial role in risk mitigation by doing extensive research while choosing sectors and assets, by tactical allocation of corpus to equity, debt and cash, by diversifying your portfolio aptly following SEBI rules and by actively monitoring your portfolio regularly.
Quant Small-cap fund is an open-ended equity scheme, launched on Nov 24, 1996. The scheme sought to generate capital appreciation by investing in a well-diversified portfolio of small-cap companies. It is benchmarked against the NIFTY Smallcap 250 Total Return Index. The fund follows a blended style of investing and holds a mixed portfolio comprising companies across market capitalisation.
| Fund Name | 1 Year (%) | 3 Year (%) | 5 year (%) |
| Quant Small-cap fund | -5.21 | 23.13 | 40.90 |
As of March 7, 2025
How Investors Can Assess and Manage Risk in Small-Cap Funds?
As an investor, you can also work on your portfolio to gain maximum return and minimise your losses. First and foremost, assess your financial condition by measuring your disposable income, medical expenses and daily family expenses that you incur. Then think about how much loss you can tolerate without impacting your essential expenditures. That will help you evaluate how much risk tolerance you possess. Then choose your funds and sectors carefully as per your risk appetite rather than blindly following the market preferences.
If you are a new entrant in the mutual fund market, start with a small sum in Systematic Investment plans. It will help you to become aware of the various nuances of investing in the market without burning your fingers. Once you see the returns and gain confidence, slowly and steadily increase your portfolio by tracking the fund performances and choosing a long-term investment horizon to mitigate further risks.
Last but not least, track your investment and make shifts, changes and reallocations as per market and fund performances to have the maximum benefit. Just putting your hard-earned money in mutual funds, that had given high returns in past, is not enough. Always remember, that excellent past performances do not ensure a high future return. Hence, monitoring regularly is prudent if your real objective is wealth accumulation and not short-term gains.
Conclusion
Just to reiterate, small-cap funds fall in the category of very high risk and you should be prepared to face losses. However, it also can generate a return beyond its big brothers like large and mid-caps. It is hence advisable to understand to what extent you can bear the risk of such investments. Having said that, Quant small-cap funds have mitigated risks by allotting a major portion of their available corpus in the large-cap to stabilise the returns and adjust the risk. Besides, its active asset reallocation across market capitalisation strategy also has helped garner significant returns in 3 years and 5 years time horizon.
By now, it must be clear to you, how important it is to evaluate your economic situation and risk tolerance level before you take the plunge. Since needs, life objectives, medical requirements etc. vary widely, it is pragmatic to align your financial goals to your investments rather than following your impulse or random advice from friends and family.
References
- https://groww.in/mutual-funds/equity-funds/small-cap-funds
- https://www.business-standard.com/finance/personal-finance/explained-should-small-cap-funds-stress-test-results-worry-you-124031800197_1.html
- https://www.motilaloswal.com/learning-centre/2023/1/what-are-small-cap-mutual-funds-risk-and-benefits-of-investing
- https://www.bajajfinserv.in/investments/reasons-to-avoid-small-cap-funds
- https://www.adgully.com/risks-and-rewards-of-investing-in-small-cap-funds-153772.html
- https://www.moneycontrol.com/mutual-funds/nav/quant-small-cap-fund-regular-plan/riskanalysis/MES011
- https://www.moneycontrol.com/news/photos/business/personal-finance/de-risking-strategy-is-your-small-cap-fund-diversified-12408701.html
- https://www.hdfclife.com/insurance-knowledge-centre/ulip-guide/what-wins-in-the-long-term-diversification-or-concentration#:~:text=Risk%2Daverse%20investors%20with%20a,industries%20may%20opt%20for%20concentration.
- https://www.personalfn.com/dwl/Mutual-Funds/unveiling-the-performance-drivers-quant-small-cap-fund-vs-axis-small-cap-fund#:~:text=Quant%20Small%20Cap%20Fund%20is%20ideal%20for%20investors%20seeking%20a,moderate%20to%20high%2Drisk%20appetite.
- https://www.etmoney.com/mutual-funds/quant-small-cap-fund-direct-plan-growth/16925#:~:text=About%20this%20fund&text=The%20latest%20Net%20Asset%20Value,%2Dyear%20are%20%2D4.30%25.
- https://economictimes.indiatimes.com/quant-small-cap-fund/mffactsheet/schemeid-66.cms?from=mdr
