These three small-cap mutual funds clocked over 50% returns in FY22. Do you own any?

India’s stocks markets turned volatile during the second half of the financial year ended March 31 after a one-way rally in the previous one-and-a-half years due to rising concerns of overvaluation and other factors.

The stock markets touched an all-time high in October last year but had fallen 7-8% by December, before coming close to its peak levels in January. The markets fell again in February as foreign institutional investors continued to sell shares and worries of impending interest rate increases mounted.

Russia’s invasion of Ukraine in late February made matters worse. But stock markets have bounced back a little in recent weeks, although some market observers still remain cautious and expect a correction in the short term.

For mutual fund investors, the last two financial years have been very encouraging. And investors who took the most risk, by investing in small-cap mutual funds, have reaped the highest rewards.

Small-cap stocks are typically much more volatile than mid-cap and large-cap stocks. As a result, mutual fund schemes that focus on small-cap stocks are riskier than other schemes but also offer the potential to generate greater returns.

So, which small-cap equity mutual fund schemes performed the best in 2021-22?

There are nearly two dozen actively managed small cap mutual fund schemes. These schemes aim to beat either the S&P BSE 250 Smallcap Total Return Index or the Nifty Smallcap 250 Total Return Index. While the BSE smallcap index clocked a return of 33.5% in FY22, the Nifty index did better with 37% returns.

Overall, about a dozen schemes exceeded returns of 37% during the financial year just ended, according to data from the industry body Association of Mutual Funds in India (AMFI).

These are Quant Small Cap, L&T Emerging Businesses, Nippon India Small Cap, Canara Robeco Small Cap, BOI Axa Small Cap, DSP Small Cap, Kotak Small Cap, ICICI Prudential Small Cap, IDBI Small Cap, Edelweiss Small Cap, Invesco India Small Cap, Union Small Cap, UTI Small Cap and Sundaram Small Cap.

Podium finish

At the top of the rankings is the Quant fund, which clocked a return of 60.8%. The fund has deployed almost two-thirds of its Rs 1,600-crore corpus in small-cap stocks and about a fourth in mid-cap stocks, according to Value Research.

It has the highest sectoral exposure to construction, FMCG, services, healthcare, metal and mining, and chemicals stocks in that order. Here, construction includes real estate, infrastructure as well as cements as categories.

Interestingly, the Quant fund’s single-largest exposure is to a large cap stock that has been a rank underperformer over the last few years—ITC.

The Quant fund is followed closely by the Canara Robeco scheme, with a return of 60% during FY22.

The fund has deployed more than half of its Rs 2,300-crore corpus in small-cap stocks and about 40% in mid-cap stocks. It has negligible exposure to large-cap stocks.

It has the highest sectoral exposure to financials, services, capital goods, materials and construction stocks in that order. The top 10 stocks in its portfolio account for just 26% of the total, compared with almost 40% for the Quant fund.

At the No.3 position is L&T Emerging Businesses Fund, which generated a return of almost 51% in FY22.

Interestingly, this fund has deployed more than half of its Rs 8,000-crore corpus in mid-cap stocks and about 45% in small-cap stocks. It has almost zero exposure to large-cap stocks. It has the highest sectoral exposure to materials, capital goods, textiles, metals and mining, and construction stocks in that order.