How to buy small cap MF now

Many readers have written to me saying that they now understand why SIP is really not the right way to invest in equity. In my last post I had written about a possible method that could be used for buying mid cap funds. In this post I will extend the methodology to small cap funds.

For purposes of simplicity we will assume that the MF in question is a pure small cap fund. It does not really matter which one, you can very well go with any of the top 5 or any of the long standing funds. For those readers who always insist on names, look at DSP BR Micro cap fund, Franklin smaller companies or some similar fund. The other assumption we will make is that the NAV of the fund is aligned to the Nifty SML 100 index. Note that you can use some other index or even the fund NAV in question. The principle of the argument however remains the same.

Based on this let us look at how things currently are for the Nifty SML 100:-

  • 1 year and YTD returns on the Nifty SML 100 are 9.2% and 10.25% respectively. So your SIP investments in the small cap MF of your choice is giving decent returns to you.
  • The above means if you buy it today, as opposed to an investment in June 2015 or January 2016 you will be worse off. Understand that a SIP is buying units at progressively higher rates in 2016.
  • Current Nifty SML 100 level is higher than 30, 50, 150 and 200 DMA. This being the case it is a bad idea to buy units of your small cap MF now.
  • Your first buying point can be when Nifty mid 100 levels go lower than 50 DMA which is about 5303 for the Nifty SML 100. In simple terms it means that any SIP in small cap funds do not make sense unless the above happens.
  • 200 DMA for Nifty SML 100 is about 5173 and if the Nifty Mid 100 levels approach this figure it will be a great time to buy your small cap MF.
  • How do I know that Nifty SML 100 will go down by 500 points or 800 points? Well, neither I nor anyone else can say this definitively. However, the current uncertain global economic situation, food inflation not coming down, corporate earning still not getting robust growth etc almost guarantees that Nifty SML 100 will not go up in a linear direction. It may either be range bound with a range of 5600 – 6000 or there can be a deeper correction post Q1 results with it going down to 5000 or so.
  • Remember that a small cap index is necessarily more volatile as compared to a Nifty or Sensex, so a 800 point drop is not very difficult in the 2-3 month period.

In the above situation, readers can follow the small cap MF buying method that I have planned to use for the rest of 2016:-

  1. Stop all SIP in Small cap MF, SIP works in very few market situation and this is not one of those situations.
  2. Wait till July end to see the impact of Q1 results on Nifty SML 100. Put 25-40% of your 6 month investment if Nifty SML 100 goes to 5500 or below.
  3. Keep tracking Nifty SML 100 for any news based correction and check if it is moving towards 5000.
  4. In any case if Nifty SML 100 is below 200 DMA start putting more investment in small cap MF.
  5. You need to make a maximum of 4 purchases in these 6 months. Tracking Nifty DML 100 is quite easy, just check in MoneyControl for the DMA figures.

I hope this has given you a good idea as to how you can get this done. I will be happy to answer any queries or clarifications that you may need.


3 thoughts on “How to buy small cap MF now

  1. Dear Sir,
    please explain DMA. where can i track nifty small 100? i found it only in one “less known” website that too only one month data. mostly i use moneycontrol for investment related information.


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