The riskier the bet, the better the potential pay-off — investors sometimes find themselves on the right side of this market axiom. If you bet money last year on funds that invest in riskier small-cap stocks, you will be sitting on tidy gains.

With handsome returns of 28.5-47 per cent, all the five funds in this category have beaten the benchmark S&P BSE Small-Cap (28 per cent) and the Sensex (23 per cent).

In fact, all these funds have outdone the BSE Small-Cap index over the past three and five years also, and most have beaten the Sensex too. The best performer is Reliance Small Cap, which has gained 11 per cent annually over the last three years and is up 47 per cent over the last year. Ranked last is Sundaram S.M.I.L.E with 28 per cent gains over the last year but just around 4 per cent annual gains in the three-year period.

Spirited show The small-cap funds that have been around for more than five years — DSP BR Micro-Cap, HSBC Small Cap and Sundaram S.M.I.L.E — have all delivered 18 per cent plus annual returns from the 2009 lows. Among these, DSP BR Micro-Cap (31 per cent yearly return) leads the pack.

Small-cap stocks may have been late to join the rally but once they did, many raced ahead. Several have been multi-baggers, doubling to tripling over the last year. This list includes usually-off-the-market-radar names such as Somany Ceramics, Eveready Industries, P I Industries, Nucleus Software Exports, Alembic Pharma and Westlife Development. Better known Aurobindo Pharma and TVS Motor Company have also more than doubled over the last year.

The script is similar over the five-year period. Stocks such as Symphony, City Union Bank, APL Apollo Tubes, KPIT Technologies, Kewal Kiran and WABCO India have also made giant strides, helping funds.

Modest returns

But note that despite these big hitters in their kitty, the five -year annual returns of these funds at 19-31 per cent are relatively modest in relation to quality mid- and large-cap schemes. Many small-cap stocks also lost heavily, with some falling by over 80 per cent. Over the last three years, nearly half the stocks in the portfolio of HSBC Small Cap and Sundaram S.M.I.L.E have lost value. This has resulted in meagre 1-4 per cent annual returns in this period.

While they are fast to rise, small-cap stocks also tend to fall harder. During the market routs of 2008-2009 and 2011, the BSE Small Cap indices dipped 80 per cent and 50 per cent.

And despite the run-up over the last year, the Small Cap index is still way below the highs of early 2008. Also, many small-cap stocks are susceptible to manipulation.

It is advisable to keep the exposure to this category, well, small.

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