SBI Small Cap Fund vs Kotak Small Cap Fund? Top Fund Comparison 2023

If you are into taking the thrilling ride of small-cap equities, Small cap mutual funds can be your ideal choice. There are plenty of star performers in the Small cap Mutual Fund category, but today we will be delving into the comparison between two top performers in this high-risk high-reward category of mutual funds, namely SBI small cap fund and Kotak Small cap fund.

Understanding Small Cap Funds

Small-cap funds focus on companies with smaller market capitalizations, often in the early growth stages. These firms rank beyond the top 250 on the stock exchange by market cap, offering high growth potential as they expand into new markets or increase product offerings. However, this potential for high returns is paired with substantial risk and volatility, making small-cap funds more suitable for investors with a higher risk appetite and a long-term outlook, typically five years or more. Over recent years, small-cap funds have shown strong returns during market upturns but are prone to significant declines in bearish phases.

How Small Caps Have Performed Compared to Other Categories

In bullish markets, Small Cap Mutual Funds often outshine large- and mid-cap categories due to the growth surge of small-cap companies. However, during market downturns, small-cap funds tend to underperform due to their high sensitivity to market fluctuations. For example, during economic booms, many small-cap funds outperform because small companies can quickly capitalize on growth trends. Conversely, they may struggle in downturns due to limited financial reserves, making it essential for investors to balance their portfolios with other categories or prepare for volatility.

Key Differences Between SBI Small Cap Fund and Kotak Small Cap Fund

1. Investment Strategy and Management Style

• SBI Small Cap Fund follows a targeted approach, investing in high-potential small companies across diverse sectors. The management team emphasizes quality stocks with a focus on earnings growth potential. This strategy is highly focused on capitalizing on emerging companies and taking advantage of their expansion phases.
• Kotak Small Cap Fund takes a more diversified approach, investing in a broader range of small-cap stocks across various industries. This approach provides a slight cushion against volatility by spreading exposure, making it somewhat less aggressive in approach compared to SBI’s fund.

2. Performance and Historical Returns

• SBI Small Cap Fund has delivered substantial returns historically, often outpacing its peers in favorable markets. However, it experiences sharp fluctuations due to its high-risk investments in smaller companies with fewer established revenue streams.
• Kotak Small Cap Fund has also shown strong performance but with comparatively moderate volatility. It typically performs well in favorable conditions but maintains a lower risk exposure, which may appeal to investors looking for a balance between growth and stability within the small-cap segment.

3. Risk and Volatility Levels

• Both funds exhibit high volatility due to their focus on smaller companies. However, SBI Small Cap Fund tends to be more aggressive, offering potentially higher returns but also a greater risk of drawdowns. This fund’s approach may be more suitable for seasoned investors with a robust understanding of market cycles.
• Kotak Small Cap Fund spreads its investments more broadly, which can help absorb market shocks to a degree. As a result, its volatility levels are slightly more manageable, making it a viable choice for moderately aggressive investors.

4. Expense Ratio and Cost Efficiency

• SBI Small Cap Fund usually has a slightly higher expense ratio, which could impact net returns over the long term. Despite this, its high-growth potential may outweigh the cost for investors seeking aggressive returns.
• Kotak Small Cap Fund generally maintains a lower expense ratio, adding to its appeal for investors who prioritize cost efficiency, especially in long-term investment scenarios where cumulative expenses significantly impact net returns.

5. Fund Size, AUM, and Liquidity Considerations

• SBI Small Cap Fund has a large AUM, which occasionally poses liquidity challenges, particularly in illiquid market conditions. Higher AUM means the fund may face difficulty executing large trades efficiently, potentially impacting performance in volatile markets.
• Kotak Small Cap Fund operates with a smaller AUM, allowing for greater maneuverability and ease in managing inflows and outflows, especially during periods of market instability.

6. Sector Allocation and Portfolio Diversification

• SBI Small Cap Fund invests in select sectors based on potential growth, such as industrial manufacturing, technology, and consumer discretionary, with higher concentration in fewer sectors.
• Kotak Small Cap Fund allocates more evenly across multiple sectors, spreading risk across industries, making it a viable option for those preferring a more diversified portfolio within small caps.

Which is Better?

The SBI Small Cap Fund and Kotak Small Cap Fund both offer compelling options within the small-cap segment. SBI Small Cap Fund is best suited for investors seeking aggressive growth and willing to weather market volatility, while Kotak Small Cap Fund provides a balanced approach to growth and risk, appealing to moderately aggressive investors. Your choice between these funds should reflect your risk tolerance, cost considerations, and long-term investment goals, as each offers unique advantages tailored to different investor profiles.

Both funds are ideal for investors with high-risk appetites looking to harness the growth of India’s emerging small companies, and each can add valuable diversification to a well-rounded investment portfolio.

Suggested Read – Best Small Cap Mutual Funds to invest in October 2024