If high risk and high reward was a tagline for any fund – it would be so for small cap mutual funds!
So, it is safe to say that ‘Small cap’ can mean a big advantage. No cap!
Today, we’ll be taking a look at small cap mutual funds to help you understand what is a small cap mutual fund, what are some of its features and benefits, and what are some small cap fund options for you to explore.
Let’s start off by first taking a look at how SEBI defines a small cap company –
Small Cap companies are those companies that are either constituents of the Nifty Smallcap 250 Index or a company, whose market capitalization at the time of investment is lower than or equal to the highest market cap stock in the Nifty Smallcap 250 Index. (Source: SEBI) Simply put, small cap companies are those which have a small market capitalization.
So, what exactly are small cap mutual funds?
Mutual funds which attribute investments to small cap companies are known as small cap mutual funds. Any time you opt for such an investment, you can be sure that your money is getting invested with a company that is categorized as small cap, by SEBI’s definition. These funds are favored typically by seasoned investors, who are used to tackling market fluctuations and have a strategy for minimizing risk in place.
With that information stowed away, let’s move on to how you can identify a small cap mutual fund, and how it can be beneficial to you as an investor!
Features of Small Cap Mutual Funds
There are a number of features that make small cap mutual funds an advantageous option for investors, over a long period of time. Some of these key features include –
1. Small Cap Stock – Since small cap mutual funds direct investments toward companies with small market capitalization which are at relatively early stages of development, these funds hold a certain growth potential (much like the small cap companies!). These kinds of investment funds are set up with the aim of creating high-value returns over long periods of time by investing in stocks that are growing as well.
2. High Growth Potential – Right from innovative ideas, to emerging technologies, to creative and niche marketing – there are so many reasons why an up-and-coming company might succeed. Small cap mutual funds identify such companies and invest with them, in the hopes that investors will benefit from the growth trajectory of small cap companies.
3. High Risk-High Reward – Small cap mutual funds can be described as having a high-risk-high-reward profile. Since small cap companies have a low market capitalization, they are considered more exposed to market volatility. The economic growth of the company is not assured since it is dependent on business risks, market policies, and many more factors; so a dip can end up costing investors, whereas gains can be incremental and significant as well – and investors’ money is subject to these market risks.
4. Long-Term Investments – If you are an investor looking for a suitable long-term investment option, then small cap mutual funds might be just what you’re looking for! Small cap mutual fund returns are the most substantial if your investment in such funds is for a longer period of time. Since these funds aim to generate high returns in a period of five years or more, investors are advised to stay patient, and diligent in their investments. Remember, time is your ally!
While you mull over some of the key features of small cap mutual funds and jot down a list of how you can identify such a fund, we’ll dive into some of the key advantages and disadvantages of such funds for investors.
Advantages (& Disadvantages) of Small Cap Mutual Funds
There are two sides to every coin, and small cap mutual funds follow that rule to a tee. There are a number of advantages and disadvantages associated with such funds, and we will be tackling these with the help of a comparative table –
Potential for exponential growth, high returns on investments – subject to picking the right small cap fund.
These are high-risk funds that are volatile to market fluctuations as compared to large cap funds.
Scope for diversification, and security for when large cap mutual funds are not performing too well.
These funds require time commitment and earn high returns, only when investments are for 5+ years.
Can be untapped by big institutional investors, giving an opportunity to the smart investor to quickly opt-in.
The time at which you buy and sell these funds is critical, and as such they are better suited for seasoned investors.
While we always encourage new investors to diversify and try various investment options, experts will offer the disclaimer that small cap mutual funds are probably better suited for investors who are familiar with market risk and are ready to ride the market fluctuations confidently.
And with that disclaimer, we come to our last little information offering – options!
Small Cap Mutual Fund Investment Options
Here is a list of some top performing small cap mutual funds in India today –
Keep in mind that small cap mutual funds are not tax-saving in nature, and the returns gained on these investments are subject to equity taxation.
Like with most investments, the most important thing to make sure if you are investing in small cap mutual funds is that your personal and financial goals should align with the high-risk-high-return profile and generally unpredictable nature of such funds.
Tell us in the comments section, what are some small cap mutual funds that have piqued your interest?
What is a small cap company?
According to SEBI – Small Cap companies are those companies that are either constituents of the Nifty Smallcap 250 Index or a company, whose market capitalization at the time of investment is lower than or equal to the highest market cap stock in the Nifty Smallcap 250 Index.
What is a small cap mutual fund?
Mutual funds which attribute investments to small cap companies are known as small cap mutual funds.
Are small cap mutual funds high-risk investments?
Small cap mutual funds can be described as having a high-risk-high-reward profile. Since small cap companies have a low market capitalization, they are considered more exposed to market volatility; thus, small cap mutual funds are considered high-risk investments.
What are some popular small cap mutual funds in India?
SBI Small Cap Fund, HDFC Small Cap Fund, Aditya Birla Sun Life Small Cap Fund, Axis Small Cap Fund, and ICICI Prudential Small Cap Fund are some popular small cap mutual funds in India today.
Do small cap mutual funds require investors to stay invested for a long time?
One can truly unlock the potential of small cap mutual funds if they stay invested for 5 years or longer.