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Investors Make Hay In Small Caps While Gold Slips In Narendra Modi’s Tenure

Financial asset classes are delivering returns to investors, and some of the best micro-asset classes have been small- and mid-cap funds.

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In today’s financial markets, the assets that have made the biggest wealth for investors are not physical assets, but under-owned financial assets. Over the last three years of Narendra Modi tenure, gold posted a mere 0.46 per cent returns.

By contrast, the best performing asset class - the small cap funds posted returns of 28.68 percent, as per data from Value Research Online as on 25 May, 2017.

Small-cap funds have been the favourites in the bourses over the last three years as many of these stocks were beaten down in the gut-wrenching slowdown of 2014, but are now recording a sizeable growth in profits.

However, mutual funds have been able to easily outperform their benchmarks during the three years of Modi tenure.

For fund managers, small-caps have generated very superior alpha over their benchmarks. For example, the small-fund category has delivered 10 percentage points higher returns, known as alpha, over the BSE Small-cap index as many stocks delivered multi-bagger like returns.

Mid-cap funds have been the second best performing asset class posting returns 20.75 percent in three years. Mid-cap funds have delivered superior returns again on the back of rising price-earnings multiples and a re-rating in many of the underlying stocks. Here again, mid-cap fund managers have been able to deliver a higher alpha than the benchmarks.

Diversified large-cap funds, on the other hand, have delivered just 11.5 percent return, as per data from Value Research. Diversified large-cap funds have outperformed its benchmark by 270 basis points, as the Nifty Index surged just 8.8 times in the last three years.

Usually, mid- and small-cap funds deliver higher returns, but also are considered more risky sub-asset classes within the larger equity asset class segment.

It seems that while equities have been the consistent go-to theme over the last three years of the Modi government’s tenure, debt as an asset class has done equally well given that interest rates were on the decline since January 2016.

Longer duration debt funds like gilt funds delivered returns of 11.46 per cent over the last three years, while credit opportunities and dynamic bond funds delivered returns of 10 percent and thereabouts in the same tenure.

On the other hand, short-term and liquid funds managed to deliver returns of 8.95 and 7.86 percent respectively.

International funds did not do quite as well because the rupee has been largely stable thanks to the lower current account deficit and rising foreign inflows. International funds fetching investors just 4.04 per cent returns.

But the worst performing asset class for investors has been gold. The yellow metal has lost some of its sheen in the international markets with the US Fed on tightening mode since December 2015. Gold funds delivered a mere 0.46 percent for investors in the last three years.

Going by the way markets are going, it appears that gold may remain range bound and just about provide very marginal gains over the next two years, and till the next general election. Small and mid-caps may continue to deliver superior returns, but the excess alpha that has been generated over the last three years may not be easy to replicate in the next two.

Needless to say, investors should continue to invest and remain invested with financial asset classes such as equity and multi-cap funds over the next two years.

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