Mutual and Small Dana (MF) schemes have dropped by almost 10 percent on average so far this year. This is truly contrary to how they behave in 2021, when this fund gave more than 60 percent of returns, on average, behind the increase in the equity market. So far this year, the BSE Sensex Tri index dropped by about 5 percent, but the BSE 250 small hat index fell by about 12.5 percent.

The question is: What is the worst behind us, and if so, is this the right time to increase the allocation for stocks and small funds, given their ability to outperform the wider market in the long run?

Understand how volatile small hat funds can get
Small hat funds can be very volatile. There are two things to watch out for in small funds. First, the category itself is very volatile in terms of performance. For example, in 2019, the BSE 250 Small Hat Index gave a negative return of around 8.5 percent, in 2020 the index rose by almost 27 percent, and in 2021 it increased by almost 60 percent.

Second, in the category of small hat stock, as defined by Sebi, there are more than 1,000 shares to be chosen. The relevance of the choice or selection of bottom-up stocks becomes clear when you consider diversity in the performance of small hats funds, both in short-term and long-term horizons <see table>.

Which brings us back to what should be investors-is this right time to increase the allocation of small capitalization, and how does someone choose from the universe of stock?

The key to the creation of wealth, but the abundant road barrier
Historical data reveals that investing in a small hat as a category will change in three years soon, but smoothly from time to time that is longer than 10 years and more. While stock selection will always be important, the overall economic environment and macro policy also have an impact on short -term trends, if you want to start a more profitable side than inherent volatility.

Smaller companies are not resistant to macroeconomic changes. Assessment for growth-oriented stocks is challenged at times when the trend rate up and we witnessed some of that happen now. Many small companies are growth oriented, and therefore, the assessment is revised, “said Trideep Bhattacharya, Chief Investment Officer-Equity, Edelweiss Asset Management Limited.

While smaller companies can show higher sensitivity to macro changes, because some do not have large -scale operating costs, in terms of other small companies, the experience of managing business dynamics throughout the economic cycle can be lost. But there is a silver layer too.

According to Harish Bihani, senior fund manager, Icici Prudential AMC Ltd., “Changing macro has the impact of the company with small capitalization. However, there may be a large number of companies that are still not affected or some that benefit from macro negative. Alam the universe in this category is quite large and the opportunities of all types are present for investors. “

Bhattacharya also talks about small companies operating in special business segments. This is an industrial leader with the ability to foster income in the long run, without having to withdraw their capital base, and therefore, can be a source of strong wealth creation in the medium term.

There are also companies that will benefit from rising commodity prices today. Some of them can only be found in the registered small hat category.

Macro risk can cause price volatility, and if the whole market corrects sharply downward, then the liquidity of the shares itself can have an impact on disproportionate prices. Experts say that investors need to maintain a long time horizon for 10 years or more for stocks and small funds where volatility caused by macro variables can launch and business basics take over.

Bhattacharya said, “Indian economy is still less similar and long-term opportunities for small companies that are well managed are growth stories that have the potential to provide premium returns.”

Not enough time to examine a small stamp? Try mutual funds
The selection of shares in any category requires research on companies and their businesses. In the case of large capitalization shares with large amounts of investors, both domestic and foreign, research rim is available from brokers and even regular news streams. For small companies, external research and news flow are limited, only because of the relatively lower level of investor ownership, and as a result, interest in the workings of small companies.

If you do not have a means to do this research yourself, a good choice is through small mutual funds. There is a pretty good choice from around 25 small mutual fund schemes like that. However, here also, the characteristics that underlie short -term volatility and the importance of selection applies.

Too much to expect that individual investors will analyze the funds portfolio. If it is difficult to do, then the next best option automatically relies on seeing past or back performance. There is no definite shot formula, but here there are some instructions that you can remember.

Look for the consistency of performance against benchmarks and the ability to preserve capital during the decline, rather than pursuing the best players in the category. Funds, which have greatly surpassed peer funds in one year, may have been significantly performing poorly in previous years or may perform poorly, advanced. Conversely, lower volatility in the desired annual return.

Try to stick to the funds that are tried and tested with the history of performance at least three years.

Finally, each small hat fund manager will have a different strategy to produce excessive returns. So, diversification throughout the two or three schemes can help.

Bihani said, “In our portfolio construction, along with focusing on well -managed companies and fundamentally strong companies where there may be stock price errors, we are aware of avoiding poorly managed companies and where financial health, both on the revenue side and balance sheet, suffer. “

Over the past 10 years, the Sensex 250 Small Hat Index has provided a revolving return of around 9 percent, while the return of an average of 10 years rolling in 11 small hat funds is around 15 percent. This is also why the active funds work best in the small hat room, compared to the passive ones.

It is important to have a small mutual fund in your portfolio. Only, be aware of volatility. The best way to beat volatility is to increase your investment time frame.

For those who want to invest in small hat funds now, avoid entering the amount of lump. Stagger for your Lump Sum Investment for the next six months. Other, Start Systematic Investment Plan (SIP)