Small-cap mutual fund

This blog gives an elaborate description of Small-cap Mutual Funds. It focuses on how one should keep a check on Small-cap mutual funds so as not to miss the opportunity to get the highest possible return. But at the same time, also be cautious about the high risks it comes along with.

· 3 min read
Small-cap mutual fund

Mutual Funds collect the money from the investors to invest in stocks, bonds, or debts and invest in different types of assets. Mutual funds are managed by fund managers who constantly monitor the growth of the companies in which the fund has invested money and rebalances funds based on the performance. There are different asset classes in which a mutual fund can invest, such as gold, debt and equity. Equity mutual funds are quite popular among those who want to invest in the securities market.

Among the equity mutual funds, there are three options in which fund managers can invest, which are Large-cap mutual fund, Mid-cap mutual fund and small-cap mutual fund.

a. Small Cap ( Less than Rs. 5,000 crores of Market Cap)

b. Mid-Cap( Rs. 5,000-20,000 crores of Market Cap)

c. Large-cap ( More than Rs. 20,000 crores of Market Cap)

What is a Small-cap Mutual Fund?

Mutual funds that invest in companies having a market cap of fewer than 5000 crores are termed small-cap mutual funds.

Overall, small-cap stocks have a bad reputation because it is highly volatile. One also says it lacks the fundamentals quality that investors should look for in a company. Although it is said that investors should invest in small-cap stocks, so they do not miss out on any opportunity, at the same time, the allocation should depend on the investor's risk profile.

Pros of Small-cap mutual funds:

Growth Potential

Most of the large-cap companies that are very successful today started at one time as small businesses. These new generation firms bring in new products and services. Everyone talks about finding the next Reliance, Infosys and Bajaj Finance because these companies were once small caps. Small-caps are companies with low total values, which can grow in ways that are simply impossible for large companies. One can make outstanding returns in this journey of a small-cap company turning to a large-cap.

Famous Mutual Funds generally don't Invest

Big mutual funds tend to invest a large amount in one company that is not supported by the market cap of small-cap stocks. This gives an advantage to retail investors who can find companies with high potential growth. When institutions start investing in these, the prices are pushed rapidly, and retail investors might not get that opportunity.

Cons  of Small-Cap Investing

Huge Risk

There is no denying that investing in small cap carries a lot of risks. Often, their valuation is based on their potential to grow, which might fail. Small-cap companies tend to have a small customer base, so their prospects are more uncertain. In turn, many small-cap stocks may not survive through the rough times.

High volatility

The price of a small-cap stock may fluctuate 5% or more in a single trading day which is intolerable for risk-averse investors.

Time

Spending time to find the small caps which can give outstanding returns is hard work. One must be prepared to do some serious research. Financial ratios and growth rates may not be published for small-cap companies.

Who should invest in Mid-cap Mutual Funds?

Small-Cap Funds invest in all companies except the top 250 in terms of market capitalization. Though these funds are relatively riskier and volatile in the short to medium term than other equity-oriented funds, they promise a higher upside of return in the long term. While allocating funds, experts say, one could consider allocating a small portion of his/her portfolio towards small-cap funds due to their volatility.

Things one should look at before investing in small-cap mutual funds

  • The goal of Investment: One should be clear with their own thought process, and should be aware of their own risk appetite.
  • Expense Ratio: Every Mutual Fund has an expense ratio, which is an expense made to manage the fund. It is an annual maintenance charge to finance their expenses. It is deducted from the amount you invested. The lower the expense ratio, the higher will be the returns earned by the investors.
  • Past Performance: One should check the past performance of the small-cap mutual fund to check whether the fund is consistently performing well or not in the past
  • Risk: One should know that all Small-cap companies will not make their way to be large-cap companies.

List of top 5 small cap mutual funds

Fund Name1 Year return5-year ReturnAUM
Kotak Small Cap fund108.6521.105,348.63
Axis Small Cap fund83.5322.346,785.27
Nippon India Small-Cap fund99.1923.6216,612.55
Union Small Cap Fund86.0116.48559.67
ICICI Prudential Small Cap Fund102.1618.053,001.62

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