Important things to know before investing in small cap funds.

Things to know about small-cap funds:

As per SEBI’s mandate, small-cap funds must invest at least 65% of their assets in small-cap stocks. The balance can be invested in large-cap, midcap, and other assets. These funds invest across industry sectors to diversify risks.

251st company onwards in terms of full market capitalization are known as small-cap stocks. Small-cap stocks are perceived to be riskier than large cap and midcap stocks, but they have higher returns potential than midcap and large-cap stocks in the long term.

The small-cap mutual funds try to take advantage of such companies. Here is a detailed guide on small-cap funds and their advantages.

Advantages of investing in Small-cap funds:

Small-Cap Funds invest in smaller companies that can become mid-cap or large-cap companies in the future. So, the return potential is very high in small-cap funds.

These mutual funds invest in companies from different industrial sectors like IT, banking/financial, Pharmaceutical & FMCG, etc. Thus it can help in the diversification of your mutual fund portfolio with small-cap exposure into various sectors.

Investors can also opt for passive investment opportunities i.e. Small-cap Index funds & reduce the risk of the portfolio.

Important Things to remember while investing in small-cap funds:

While a small-cap fund does have excellent potential, there are few important factors that an investor should know before investing.

High Risk & Volatility:

Small-cap funds invest primarily in small-cap companies & they are risky and highly volatile by nature. Thus, NAV can fluctuate wildly during volatile markets.

Long term investment horizon:

Most small companies require a lot of time to witness significant growth. Thus, these funds are ideal for long-term investors i.e., the Investment horizon should be more than 5 years.

Suitable for Aggressive risk profile:

Small-Cap Funds are suitable for investors with an Aggressive risk profile as they can generate high returns at the cost of high risk & volatility.

Portfolio composition matters:

Small-cap companies do have great potential for growth but they also carry a significantly higher level of risk. Hence, check the composition of the fund thoroughly before making any investment decision & prefer funds from reputed fund houses with experienced fund managers.

Remember, investing in small-cap funds can boost your portfolio returns significantly.  Invest in small-cap funds with us.

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