What does history say about small-cap fund performance in 2020?

The year 2020 has started with a good note for the broader market.  After witnessing a subdued performance in the last two years, the broader market has given a positive return, year till date. Mid-cap dedicated indices on an average have generated a return of six per cent, year till date. Small-cap indices in the same period have generated a return of 6.72 per cent. Against this, the large-cap based indices such as Nifty 100, has generated a negative return.

Mutual fund schemes dedicated to such indices have also done well during this time. On an average, mid-cap dedicated funds generated a return of 6.72 per cent and small-cap dedicated funds have generated a return of 7.17 per cent.

Does this mean that after a couple of years of under-performance, we are going to see year 2020, as a year of broader market? To understand this, we checked the historical returns of the small-cap funds and indices.

There are hardly two consecutive years when the small-cap dedicated funds on an average have generated negative returns.  In 2018 and 2019, both the years, small-cap fund, though it outperformed the small-cap index, generated a negative return.  Only in year 2017, the small-cap index outperformed the funds dedicated to small-cap stocks.

Moreover, our analysis shows that after two years of subdued performance, small-cap tends to give spectacular returns to their investors. In the last two years, small-cap has already given a negative return of more than 25 per cent and hence, is set to generate better returns going ahead.

Analysis of two year rolling return of the small cap funds and index shows that it is going to generate better returns in the year to come. Two year rolling return of small cap indices shows that performance has already turnaround for small cap few months ago and is likely to continue for next couple of years.