Investing in small cap funds can be a smart way to achieve significant growth in a structured manner. These funds allow you to invest in companies’ stocks with a small market capitalization. One such fund that offered immense growth in recent times is the Tata Small Cap Mutual Fund.
Offering a return of 30.44% in the last 6 months, this fund has helped investors create wealth. But the question is how? Well, in this blog, let us explore the strategies adopted by Tata Mutual Funds to navigate the small cap market and earn competitive returns for its investors.
About Tata Small Cap Mutual Fund
Tata Small Cap Fund was launched in 2018. It targets businesses expected to grow steadily over the next few years, focusing on solid financial foundations and fair pricing. It carefully picks stocks that promise profitability and cash flow improvements.
The aim is to invest in companies set for a potential increase in market value. The fund’s approach is simple:
- Invest in low-debt, high cash-flow companies at reasonable prices
- Hold them long-term,
- Steer clear of global commodity markets.
Strategy Behind Tata Small Cap Mutual Fund Growth
Since its inception, the fund has gained 30.34% annualized returns, crossing the benchmark of 25.3% by Nifty Small Cap 250 TRI as of 31 July 2024. This gain is based on the strategic investment approach adopted by Tata Mutual Small Cap Fund, which ensured substantial growth even in the small cap segment.
Here is how it ensured the same:
1. Stock Allotment
As mandated by SEBI, it invests 65% of its assets in small cap stocks, which are defined as those that rank beyond the 250th position in terms of market capitalization.
Using the bottom-up strategy, the fund carefully selects stocks based on an in-depth analysis of their valuations and fundamental strengths. This approach allows it to identify companies with solid potential for growth and profitability.
2. Growth-Oriented Investment Philosophy
The fund follows a ‘Growth at a Reasonable Price’ (GARP) philosophy. It focuses on companies that show potential for increased earnings and cash flow and maintain strong balance sheets.
This dual focus ensures that investments are safe and offer substantial growth against the expected market performance.
3. Diversified Portfolio
Rather than focusing on one segment, it spreads investments across 50-60 stocks.
This diversification helps mitigate the risks inherent in the small cap market while ensuring that the fund can capture growth across various sectors and industries.
4. Sector-Focused Allocations
Tata invests in high-performing sectors such as engineering, infotech, consumption, finance, and chemicals. This allows the fund to benefit from sector-specific trends and growth opportunities.
By aligning its portfolio with sectors that have higher growth trajectories, the fund enhances its potential to generate superior returns.
5. Managing Market Volatility
Tata Mutual Small Cap Fund’s strategy of focusing on strong, reasonably priced companies with good market potential helps it manage market fluctuations effectively. Its low portfolio churn and strategic stock picks contribute to steadier performance, even in turbulent times.
6. Liquidity Management
Tata Small Cap Mutual Fund strategically manages liquidity, with the ability to liquidate funds as needed.
This careful planning ensures the fund can handle redemption pressures efficiently, maintaining flexibility and stability in the volatile small cap market.
Conclusion
Investing in Tata Mutual Small Cap Fund can offer attractive returns in the long run, owing to its strategic investing plan. The fund effectively manages market volatility by maintaining a diversified portfolio and adhering to a ‘Growth at a Reasonable Price’ philosophy, ensuring stable, long-term returns.
This approach makes it an attractive option for investors seeking to capitalize on the growth potential of small cap stocks.
Please note: This is not a recommendation, please do your due diligence before investing.
