In equity funds, the market capitalisation of companies has become increasingly important for investors. It provides insight into the risks and potential returns, but it's not the only factor to consider when investing in small-cap funds. Market capitalisation alone doesn't answer all the questions about a company's potential:
● What makes small cap funds a potentially lucrative investment option for you?
● Will they meet your expected returns over your 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 are ranked 251 onward in terms of market capitalisation. As per SEBI guidelines, small-cap funds must invest at least 65% of their total 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. If and when it does grow, its share price may eventually increase the NAV of the small-cap fund.
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 may attract investors looking for investment opportunities in small companies, it may also increase or decrease the fund value based on market volatility.
2.Relatively high risk-to-reward ratio
Small-cap mutual funds like any other Equity Oriented Funds have higher risk levels associated with them however, they may outperform many 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 risk – adjusted returns, keep the following tips in mind:
1.Check the investment cost
The cost of managing small-cap funds is their expense ratio, which may vary between direct plan and regular plan.
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. Small cap funds have the potential to grow and yield good risk adjusted returns in the long run and can be suitable for investors with long term goals, like education for children, retirement planning, debt repayment etc. Investors with high-risk appetite should keep in mind the long-term financial goals before investing in small cap funds.
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.
