Mumbai, Jul 29 (IANS): Small cap funds has come under the spotlight after it is offering just over 28 per cent returns in the last three years. The returns on these funds are the highest in the equity segment. These funds have a potential to generate higher returns if an investor have a patience to tolerate volatility and ready to take some extra risk.

According to Value Research, a mutual fund tracking firm, small cap funds are offering 28.59% in the last three years. Twelve schemes in this category are giving returns more than 30 per cent, of which Quant Small Cap Fund is offering highest returns of 44.11 per cent, which is followed by Bank of India Small Cap Fund offering 38.90 per cent and Canara Robeco Small Cap Fund with 38.61 per cent returns. While, Aditya Birla Sun Life Small Cap fund is offering 18.20 per cen returns.

As per SEBI's mandate, small cap fund invests a minimum of 65% of the corpus in equity and equity related instruments of small cap companies. These companies are ranked below 250 in terms of market capitalisation.

"Before the volatility set in the equity market post Geo Political crisis, broad market rally had begun on expectations of growth in economy to return. On the back of post pandemic economy opening trade, small cap companies began to find traction from Money manager . Second small and mid size companies were also benefiting out of low interest regime on the back of high liquidity in the system," said A Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC.

Investment Managers says small cap funds are risky because they invest in stocks of very small companies. These companies are volatile in nature than large cap or mid cap companies. Investors investing in these funds should have a long term investment horizon to generate better returns.

Small cap schemes generally comes with higher risk from the volatility point of view, however they tend to perform well in the long run compare to large cap companies and therefore these schemes should be considered for investment as part of the asset allocation with a goal to stay invested through all cycles.