Many investors have got burnt by the high volatility in small-cap funds. In 2017, the Nifty Small-cap 250 Index was up 57.43 per cent. But since then it has been downhill all the way: -26.65 per cent in 2018 and -11.76 per cent year-to-date in 2019.
One way investors can deal with the high volatility in small-cap funds is by having a limited allocation of 10-15 per cent of the equity portfolio to them. Two, start booking profits as valuations rise above long-term average levels. Three, take the SIP route to average out purchase cost. And finally, have a horizon of more than five years. Longer-term returns still look good (see table).