The 'Worst Small Cap Fund' SIP Experiment: Returns Will Surprise You!

If you are a mutual fund investor, you have at least once searched for the 'Best Mutual Funds to Invest' on Google. So, did it help? Did you invest in them? And, did they remain 'the best' forever?

A simple answer would be a 'No'. Why? What happened to those funds?

Answers to these questions lie in the fact that no mutual fund can remain at the top forever. Mutual funds invest in markets — stock markets, in the case of equity funds, or in bond markets, in the case of debt funds. The performance of these underlying instruments, such as stocks and bonds, fluctuates due to various micro and macroeconomic factors.

Similar to the case of equity funds, if the stock markets are rising, the chances of equity funds that have invested in the rallying stocks generating higher returns increase. And the one who missed investing in those particular stocks, or perhaps whose mandate does not allow them to invest in those stocks, would not be able to generate the best returns during that specific time period.

So, given the dependency of mutual funds on volatile stock and bond markets, no mutual fund can stay at the top of the charts forever.

Now, what was the need for this whole story? To set the context for an interesting data study we conducted at Outlook Money,

Against those investors who always look out for the best mutual funds, we assumed an investor who, due to some XYZ reason, fell for the 'worst mutual fund scheme' of the year and continued investing in it via SIP till today.

The idea was to understand what kind of money or returns an investor could make if they invested in the worst-performing fund of the year and continued with it for a long time period.

And the returns on investments will amaze you!

But before we look at the results, it is important to understand how we did this study.

How We Did It: Methodology

We conducted this study on the small-cap funds since small caps have lately been the most favourite category for investors due to a simple reason – the high returns they were able to generate over the last few years.

Small-cap funds are a highly risky investment option, as they typically invest in small-sized companies. So, don’t treat these as our recommendation. We always believe that investors should invest according to their goals and risk appetite.

Coming back to the study. We looked at the annual calendar year returns generated by small-cap funds starting in 2015.

Next, we selected the three worst performers of that year. We repeated this for all the years till 2021.

Now, we have assumed an investor began to invest in these funds from the year they were recorded as the worst-performing via a monthly SIP. And he continued investing in them till today.

So, for instance, in 2017, Quant Small Cap was the worst performer in the small-cap space with annual returns of about 5 per cent. According to our study, an investor began investing in this fund via SIP in the same year and has continued his SIP investments to date. So, it has been 8 years since then.

In the next step, we calculated the actual SIP returns of all these funds using the SIP calculator on Value Research.

Investing in Worst Small Cap Funds: Returns

So, had an investor invested in one of the worst-performing small-cap mutual funds of the year through SIP, what kind of returns or corpus would he have built today? Look at the table for results.

In 2015, the three worst-performing small-cap funds were ICICI Pru Small Cap Fund, HDFC Small Cap Fund, and Sundaram Small Cap Fund. And if an investor had started investing Rs 10,000 per month in, say, ICICI Pru Small Cap Fund via SIP, then, and continued till today, that is for 10 years, he would have invested a total of Rs 12 lakh. His annualised SIP returns would have been a whopping 19.64 per cent. His total investment amount, worth Rs 12 lakh, in these 10 years, would have grown to about Rs 34 lakh, little short of 3x.

Let’s look at another example. SBI Small Cap Fund was one of the three worst-performing small-cap funds in 2016. Had an investor started to invest via SIP in that year and continued till today, that is for nine long years, he would have earned an annualised SIP returns of 19.49 per cent and his investment value of Rs 10.80 lakh would have grown 2.5 times to Rs 26.91 lakh.

The results were not bad at all! Were they? We saw similar inflation-beating, double-digit returns for all other schemes as well.

Now, if investing in a worst mutual fund can deliver this kind of return, imagine the returns if you are able to pick a consistently average-performing mutual fund for your long-term goals.

So, going by the historical numbers and this simple study, we can say that chasing the best mutual funds may not be required. What is required from an investor is a disciplined approach and continuing with investments for a long time period.

We will perform this study on other categories of equity funds, like mid caps, flexi caps, and large caps, as well, to understand the consequences.

Hope you found this useful. But don't base your investing decisions on this study alone. This study was done for educational and informational purposes only.