SMALL CAP FUNDS : WHY CHASING WINNERS CAN COST YOU
Investing in small-cap mutual funds can feel like a game of Snakes and Ladders.
One year a fund soars, the next it plunges. Over 14 years, the top-performing small-cap fund has constantly changed hands; no single fund stays on top.
This blog will explore this rotating performance and explain why chasing past winners is a risky strategy. We’ll also show you how to invest smarter with expert advice.
Understanding Small Cap Funds
Small-cap funds invest in smaller companies outside the top 250 by market cap. These businesses have high growth potential but are also highly volatile. They can deliver impressive returns (+70%) in good years but also steep losses (-25% or more) in bad ones, making them exciting but risky.
Winners Rotate – What the Data Says
Data from 2011-2024 reveals a clear pattern:
– No single Asset Management Company consistently tops the list.
– Funds from Franklin, Nippon, ICICI, SBI, and DSP have all seen their turn at the top and the bottom.
– Nippon, a top performer in 10 out of 14 years, also hit the bottom in 2017 and 2018.
– Franklin, a top performer in 2012, 2013, and 2015, was among the worst in 2017 and 2020.
This confirms that past performance does not guarantee future results, especially in the small-cap segment.
Snakes and Ladders- The Perfect Analogy
A fund’s climb to the top is like landing on a ladder. But frequently, that same fund slides back down the next year, like hitting a snake. Occasionally, a bottom-ranked fund will shoot to the top.
This rotation isn’t just luck; it’s due to varying fund manager strategies and market conditions. Constantly switching funds based on who’s currently “winning” is like playing the game based on others’ moves and it simply doesn’t work.
Why Chasing the Top Performer is a Trap
Investing in a top-performing fund from the previous year, hoping for similar returns, often leads to disappointment. The fund might underperform, your expectations won’t be met and you might panic-sell or switch to another “hot” fund, repeating a cycle known as performance chasing. This is a major reason investors fail to build long-term wealth.
At White Ocean, we suggest clients avoid emotional decisions and focus on long-term investing.
What Actually Works- Consistency and Advice
You don’t need to be in the absolute best fund every year to build wealth. A consistent performer, one that stays in the top 5 or 6, can deliver competitive returns over time without unnecessary risk or frequent switching.
At White Ocean, we focus on:
– Risk-adjusted returns over flashy numbers.
– Funds with strong management, process, and discipline.
– Diversification across fund houses.
– Personalized plans based on your goals and risk tolerance.
We also guide you to stay invested through market volatility, as missing a recovery can be more detrimental than riding out a downturn.
Conclusion
The small-cap space will always be dynamic, making it nearly impossible to perfectly time entries or exits. Step back and see the bigger picture. Like in Snakes and Ladders, success isn’t about one big roll; it’s about consistent progress, avoiding unnecessary risks and having a solid strategy.
