In the realm of equity funds, investments based on market capitalisation have gained a lot of importance over time. Individuals asses the performance of the companies whose stocks a particular mutual fund invests in. While this analysis can give you some idea about the risks involved and expected returns, it is not enough before you start investing in small-cap funds. For instance, you cannot answer the following questions by only looking at the companies’ market capitalisation:
● What makes small cap funds a potentially lucrative investment option for you?
● Will they be able to deliver the optimal returns over the investment horizon?
● Why do retail investors like you may feel attracted to small-cap funds?
Building a well-defined investment portfolio is about carefully selecting mutual fund schemes after conducting in-depth research. If you want to start investing in small-cap funds, this guide is meant for you.
Small Cap Fund – Definition
Small-cap mutual funds
invest a major proportion of their investible corpus in equities or equity-related instruments of small-cap companies. These companies stand at the 251st rank or higher in terms of market capitalisation. As per SEBI guidelines, small-cap funds must invest at least 65% of their total investible corpus in equities or equity-related instruments of small-cap companies.
As a subcategory of equity mutual funds, small-cap funds carry a significant level of risk. On the brighter side, these funds can generate wealth in the long term. This can be easily understood considering the fact that a small company has good scope for growth. When it does grow, its share price will eventually increase the NAV of the small-cap funds.
Features of Small Cap Funds You Might Not Know
1. Equity asset allocation
Small-cap funds invest at least 65% of their total corpus in equities or equity-related instruments of small-cap companies. While this feature attracts investors looking for investment opportunities in small companies, it also means that it tends to affect the fund value based on market volatility.
2. High risk-to-reward ratio
Even the top small-cap mutual funds have high risk levels associated with them. However, they may outperform other equity-oriented funds in the long term and may generate substantial risk adjusted returns in the long term.
Tips to Invest in Small Cap Funds The Right Way
As in the case of any other
mutual fund scheme,
the value of small-cap funds also fluctuates as per market conditions. To benefit from the potential of small-cap funds to generate substantial returns, keep the following tips in mind:
1. Check the investment cost
The cost of managing any mutual fund scheme is their expense ratio, which may vary from one category of scheme to another and one fund to another.
You are advised to compare different small-cap funds in terms of their expense ratio before you add them to your portfolio.
2. Consider your financial goals
The fundamentals of effective financial planning stand at investing in different mutual fund schemes based on your financial goals. With goal planning, you also get an idea of the amount of time that would be required for the fulfilment of the desired goal, based on which you can select a small cap fund that can possibly generate the returns you expect.
3. Know about the taxation
The taxation of mutual fund schemes takes away a significant pie of the return you will receive based on your investment horizon. Hence, it makes sense to consider the tax liability arising depending on redemption of units in short-term or long-term.
At last, whether small cap funds are suitable for your portfolio or not depends on your understanding of the underlying risks, financial planning, and tax planning.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
