MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved
Should I start SIP in small-cap funds? If yes, which would be the best fund to invest in?

-Rishit Shah

Small-cap funds are open-ended equity-oriented schemes which pre-dominantly invest in small-cap stocks. As this scheme invests in equity and equity-related instruments it comprises higher risk as compared to debt-related instruments, large-cap stocks or mid-cap stocks. As you haven’t mentioned your risk appetite and investment horizon, we recommend that you start investing in these funds only if you have a higher risk appetite given the fact that these funds are not apt for conservative investors. Those investing in these funds should at least have five to seven years of investment horizon.

Small-cap funds might perform better as the economy is reviving and a majority of the sectors are bouncing back to normality. This would boost the performance of Small-cap companies which are the underlying securities of this fund. Small-cap stocks might be volatile in nature and so before investing in these funds assess your risk capacity and then proceed further. As you will be investing through SIP you will get the benefit of rupee cost averaging as well. Let’s look at the best performing small-cap funds on the basis of one-year return along with AUM and expense ratio. 

What is the difference between contra funds and value funds?

- Reshma Rajput

Both contra fund and value fund are sub-categories of the equity scheme. Both are open-ended funds. Value fund follows the strategy of value investing. So, what is value investing? When a fund manager adopts a value investing strategy, he looks for stocks which are undervalued or may trade for less than their intrinsic value. These stocks have the potential to grow in the future. When the intrinsic value of any stock or company is more than its market value it is known as value. Hence, fund managers of value funds search, analyse and then invest in such value companies.

On the other hand, contra funds follow contrarian investment strategy. Fund managers invest against the existing market trends by purchasing stocks that are either under-performing or depressed at existing point in time. In this investment strategy fund managers have to keep watch on under-performing or depressed stocks which have potential to grow in future, they stay invested in such stocks till the demand increases. This scheme is ideal for investors with higher investment horizon as they outperform in longer-term. Investors with short investment horizon shouldn’t invest in these schemes. Therefore, value funds invest in any stocks by adopting a value strategy which have less market value and high intrinsic value. Whereas contra funds invest in stocks which are under-performing and have higher prospective growth.