Small-cap funds are mutual funds invested in the stock of companies with small capital. Usually, the companies in which these funds are invested are companies listed in 250 in the compilation of stock market capitalization, with capital less than ₹5000 crores. While their returns are relatively higher than other mutual funds, investment in these funds is riskier and more volatile. In the section below, we’ll discuss the small cap fund and its benefits.
Let’s get started.
Meaning and Profile
Small-cap funds are equity funds that grant a major portion of funds to small companies. These funds lie beyond 250 companies in the Security and Exchange Board of India list.
The fund managers invest in the stock expected to make high returns and growth in the future. Therefore they look out for small companies with consistent performance in the market rather than large-cap investors. Furthermore, small-cap funds provide better and higher returns than large-cap funds in the market with rising share prices.
- Small-cap funds can give high returns as they have more room for growth in the future.
- Small-cap funds can be riskier than others as they lack the financial resources to tackle the tough market conditions.
- Sometimes, they might take time to provide high returns and outshine the market, but they can deliver consistent returns for the long term.
- As per the Security and Exchange Board of India, Small Cap must invest 65% of their funds in companies with small stocks.
- Small caps mostly focus on companies with a single line and less diversified businesses.
How Do Small Cap Funds Work?
Small Cap funds are usually the best choice for those with a high-risk appetite and who prefer higher returns over stability, as small-cap invests in all those companies with small capitalization that have shown positive growth and are in the top 250 companies, according to SEBI. Also, these companies’ shares can show positive growth in a very short period. But, like other investments in the market, the risk always remains the same. Thus, make sure to have proper and organized financial planning before investing.
Advantages of Small-Cap Funds
- Small-cap funds are the best option if you are looking for an mutual fund investment plan for wealth creation, as they focus on growth opportunities that can create valuable assets. Also, if your large-cap fund is unable to give you reasonable returns, small-cap funds can do that, as when they get affected by the market, then large-cap funds can make the portfolio returns stable.
- Small-cap investments are best for long-term investments of at least 5 to 7 years. As they mainly focus on growth and will take time to outshine in the market. So, it allows you to stay invested long-term while enjoying the benefits of high returns.
- Large-cap funds ignore most small-cap funds due to a lack of liquidity, allowing stock to move on its merits, so the chance of rising the price is higher.
- Small-cap funds can reduce risk and diversify your investment, as they help balance risk-reward.
- You can merge your small-cap funds with larger counterparts for their growth. And this will result in the stock price of small businesses rising, and with that, the value of small-cap funds can increase.
Small-Cap Investment is Suitable for Which Type of Investor
If you are an investor who prefers returns and benefits and has a high-risk appetite, a small-cap investment is the best choice, as these funds offer investors the opportunity to earn high returns. However, they lack financial stability and are highly volatile and risky. Furthermore, ensure that these funds get highly affected when there is a downfall in the market. So, investing a small portion of your investments to small-cap funds is advised.
It is important to consider the last performance of the funds before investing in them. Also, check the expense ratio, the performance of competitor funds, and the investment portfolio. Besides these points, gaining knowledge of the financial market before investing is important.
These tips will help you to assess concentrated and credit risk as the fund’s manager thoroughly researches, so make sure to gain proper knowledge on your own to get the best returns. Hopefully, all these tips will help you with your future investment plan and also allow you to fulfill your long-term financial objectives.