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MUMBAI: If you want to know ‘the power of small’, the best person to ask is a small-cap mutual fund investor. Small- and mid-cap funds that

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invest in relatively small value, illiquid stocks have handily beaten large-cap funds by a wide margin. While one-year returns on small-cap funds have been in the range of 105-110%, gains on heavyweight blue-chip funds, which are often regarded as flagship schemes, are much lower, with average (category) returns falling between 75% and 78% for one year.

According to fund managers, though the market has run up over the past one year, hurtling stocks to the expensive zone, there are still factors that could sustain small- and mid-caps rally for some more time. While sector frontliners have run ahead in terms of valuations, there are several mid- and small-cap stocks that have relatively more upside to grow in value.

In terms of earnings growth, several mid- and small-cap companies have beaten their larger peers (though business turnover of smaller companies is anything but significant to compare with large-cap companies).
“The best thing about a small company is that minor improvements in corporate numbers or working style reflect on their stock price. Small improvement here and there contribute so much to their stock price,” said A Balasubramanian, CEO, Birla Sunlife Mutual Fund

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According to fund managers, small companies with good management vision and ability to offer rare products or services make it to fund portfolios. Though large-cap stocks tend to balance the earnings capacity of a portfolio, it is lesser-known volatile stock groupings that give the portfolio an extra ‘gain-kicker’. If one were to see small- and mid-cap businesses that made it big over the past few years, companies such as Hero Honda (the larger peer being Bajaj Auto), Maruti (the larger peers — M&M and Tata Motors), Marico and Godrej Consumers (the larger peer being HUL) would top the list.

“Spotting a potential multi-bagger is the key to small- and mid-cap fund management. Small-cap fund managers do thorough research before allocating money to smaller companies. The general belief is that if a small-cap company is doing well, it will match up to large-cap companies in terms of returns,” Mr Balasubramanian added.