The year 2021 was a year of risk-on trade. In India, equities–particularly smaller companies–remained a popular choice among risk-taking investors amidst a buzzing IPO market and expensive valuations.<\/p>\n\n\n\n

Small-caps mutual funds<\/a><\/strong> reported net inflows worth Rs 2,780 crore in 2021 with 68.49 lakh folios as of November 2021 compared to 49.80 lakh folios in December 2020. Investors looked up to small-cap mutual funds to accelerate wealth creation over the long term.<\/p>\n\n\n\n

Graph 1:\u00a0Month-on-month inflows into small-cap mutual funds in 2021<\/em><\/strong><\/p>\n\n\n\n

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(Source:\u00a0AMFI<\/a>, PersonalFN Research)\u00a0<\/p>\n\n\n\n

Small-cap companies, as you may know, are relatively lesser-known or undiscovered companies that hold the potential to generate multi-bagger returns and become the large-cap companies of tomorrow. Are you aware that Bajaj Finance, Titan Company, Britannia Industries, which are among the large-cap names today, were small-cap stocks around a decade ago? Having said that, do not be under an impression that every small-cap stock becomes a large-cap or generates attractive returns. It is noteworthy that, for every high-potential small-cap, there is a long list of stocks that can turn out to be wealth destroyers.<\/p>\n\n\n\n

In 2021, small-caps outperformed the bellwether indices significantly. The Nifty 50 Total Return Index (TRI) generated 26% absolute returns in the year gone by, whereas the Nifty SmallCap 250 TRI clocked a stellar 63% absolute return. On a 3-year performance, the Nifty 50 TRI has generated 18.3% CAGR while Nifty SmallCap 250 TRI has yielded 24.2% CAGR. This is despite the underperformance of small-caps between 2018 and 2019.<\/p>\n\n\n\n

Identifying potential multi-bagger small-cap stocks and investing directly is a difficult task. To invest in small-caps and to diversify your investment portfolio well, it is sensible to invest in a small-cap fund, wherein the professional fund manager and his research team would do the job of picking high growth-potential quality stocks for you.<\/p>\n\n\n\n

How have small-cap mutual funds performed in 2021?<\/em><\/strong><\/p>\n\n\n\n

Small-cap mutual funds have generated 63% returns on an average in 2021, thereby performing almost at par with Nifty SmallCap 250 TRI.<\/p>\n\n\n\n

While the broader market trend and undercurrents have been supportive for small-caps, the active stock selection of small-cap mutual funds has been able to deliver returns in the year gone by. For instance, small-cap mutual funds have taken a low or limited exposure to financial stocks which have been the laggards in 2021. Instead, they have bet on smaller companies from the outperforming sectors such as IT, healthcare, chemicals, construction, engineering, metals, and FMCG, amongst others. Amidst overheated market conditions, certain small-cap mutual fund schemes that took cash calls or followed defensive strategies, underperformed. Against that, small-cap mutual funds that went aggressive taking active portfolio calls did exceedingly well.<\/p>\n\n\n\n

Table 1: Top-5 Small-cap Funds<\/em><\/strong><\/p>\n\n\n\n