Long-Term Returns: Small Caps Beat Big Brothers In 5-Year, 10-Year Equity Mutual Fund Race
In the world of equity mutual funds, long-term holding is generally recommended to ride through market cycles. As on December 11, 2023, small-cap funds reign supreme in both five-year and 10-year tenures.
Over the past five years, small-cap funds have beaten every other category of mutual funds with an impressive 26.11 per cent return. Small-cap funds have also maintained their lead in the 10-year timeframe, with 23.72 per cent return. However, these funds invest in small-cap companies, which make them risky. Thus, their stocks can be very volatile. But they are currently going through a growth stage, hence the stupendous returns. So, for the more conservative investors, who may be a bit risk averse, here are the next best performers.
The top-three performing categories in longer tenures are identified by analysing returns over five years and 10 years. Note that we have not included sectoral or thematic funds in this analysis.
Top Performers in 5-Year Category
As mentioned earlier, small-cap funds lead the list with 26.11 per cent returns. The funds in this category collectively gave almost 3 per cent alpha over the benchmark in five years.
In second spot are the mid-cap funds, which are known for better stability than small caps, and gave returns of 22.54 per cent. These funds invest in companies ranked 101 to 250 in market capitalisation. In the 5-year category, contra funds at 21.2 per cent took the third position. Contra funds, also called contrarian funds, go against market trends by investing in undervalued stocks. They are required to invest at least 65 per cent in stocks.
Top Performers in 10-Year Category
Small-cap funds are the top performers with 23.7 per cent returns. The funds in this category have collectively beaten the benchmark by around 4 per cent. Mid-cap funds follow closely at 21.47 per cent.
Multi-cap funds are at the third position with a decent 19.3 per cent return. Multi-cap funds invest in stock across market capitalisation, with a compulsory minimum allocation of 25 per cent each in large-, mid-, and small-caps.
Conclusion: Top 3 Performers
Small-cap funds topping both five- and 10-year tenures show their ability to weather market fluctuations over extended periods of time. The next best performer are the mid-cap funds. For the third place, it is a close fight between multi-cap funds and contra funds, where contra funds win by a small margin.
Large-cap funds, renowned for their stability, have shown the lowest returns both in five years (16.2 per cent) and over a decade (15.2 per cent). But this was expected given the nature of their investment.
