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Financial Term of the week- Small-Cap mutual funds

Small-cap mutual fund schemes invest at least 65% of their assets in equity and equity-related securities of the small-cap companies. Securities & Exchange Board of India (SEBI) categorizes the companies listed on the stock exchange into various categories on the basis of their market capitalizations. Market capitalization is the total value of all the outstanding shares of a company. For example, if a company has 2,00,000 outstanding shares priced at Rs. 10 per share, then the total market capitalization of the company will be Rs. 20,00,000. On the basis of market cap, Securities & Exchange Board of India (SEBI) has categorized various companies for investment by Mutual Funds as below-

How do small-cap mutual funds work?

Small-cap funds invest in companies with ranks 251 onwards. These are relatively smaller companies that operate in emerging/growing segments and may have high growth potential and at the same time may carry a relatively higher risk as well. Normally when you invest in stocks, your capital increases with the increase in the share price of the company you are invested in and likewise, decreases with a decrease in the share price. That is why investors aim to invest in companies that are likely to see a growth spurt in the future. A smaller company is likely to grow at a faster pace than a large company because the large company has already seen the high points- this is the principle behind small-cap funds . But a small company is also susceptible to higher risk owing to the same reason. The fund manager endeavours to pick the companies that have a growth potential and invests the corpus in them, aiming at higher long-term returns. But as always is the case with equity, there is a certain amount of risk associated that can’t be ignored.

Features of small-cap funds-

1. May have the potential to deliver relatively better returns than large-cap and mid-cap funds in the long run
2. Can be highly volatile
3. They have more risks associated with them than the large and mid-cap funds

Who should invest in small-cap funds?

Investors having long term horizon of more than 10 years & also the risk appetite for the same, may want to consider small-cap funds

For Long term financial goals like retirement, child education, etc. also, one can consider small-cap funds.

How are small-cap funds taxed?

The returns derived from small-cap funds, also known as the capital gains, are taxed as below-

Short-term capital gains (STCG) tax- For an investment horizon of lesser than 12 months, the capital gains are considered as short-term capital gain, which is currently taxed at 15%.

Long-term capital gains (LTCG) tax- For an investment horizon of more than 12 months, the capital gains are considered as long-term capital gain. The tax applicable is 10% if your capital gain is Rs 1 lakh or above and comes with a Grandfathering clause. This clause basically exempts all gains made before 31st Jan’18 from any tax.


Disclaimer:
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/InvestorEducation/what-to-know-when-investing.htm This is an investor education and awareness initiative by Nippon India Mutual Fund.
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