If you are new to investing in mutual funds you may be overwhelmed by a lot of jargon. Terms like Small-Cap, Mid-Cap, Large-Cap are just a few that mutual fund investors need to be familiar with. You may even have heard your friends debate whether SBI small-cap funds are better than HDFC small-cap funds. Or perhaps even wondered if the growth of Reliance as a company directly impacts Reliance small-cap funds? In this story, we’ll understand what a small-cap fund is and what differentiates them from others.
What is a Small Cap Fund?
Equity Mutual Funds can be broken down basis the size of the companies they invest in. Small-Cap Funds are therefore funds that invest in companies that have a market capitalization of under Rs.500 Crores. These funds are required to invest a minimum of 80% of their assets in small companies as per the Securities And Exchange Board Of India. Besides the Rs.500 Crore market capitalization, these small companies can also be defined as those that are ranked 250 or lower in terms of market capitalization.
Who should invest in Small Cap Funds?
Whether or not you invest in small-cap funds depends on your age, risk appetite, financial goals, and portfolio allocation. That means you should invest in small-cap funds if you are a long-term investor who is willing to accept higher risk for potentially higher rewards. These funds are investing in small companies that have higher growth potential. That is why the returns can be promising but at the same time, as these companies grow bigger you stand to gain from their growth.
What are the risks of investing in Small-Cap Funds?
There is always a risk-reward ratio that you must keep in mind when investing. Given below are some of the biggest risks of investing in small-cap funds:
- Small-Cap Funds can bring you losses over the short-term.
- If you’re not prepared to see negative returns you should not invest in small-cap funds.
- Small-Cap Funds also tend to fluctuate more in value than Mid-Cap or Large-Cap Funds
- Small-Cap companies don’t have long protracted histories to base investments on. That means you may not have a lot of past performance to base your judgements on.
- They have lower liquidity than large-cap funds
- Small-Cap companies face more cash-flow issues during bad economic phases
- Small-Cap companies face a larger threat in terms of change in consumer preferences
Why invest in Small Cap Mutual Funds?
There are of course many advantages of investing in small-cap funds as well. Listed below are some of the most popular reasons for investing in them:
- Higher growth potential: It is easier for small-cap companies to generate big growth rates
- To diversify your portfolio: If the rest of your portfolio is low-risk & low-return
- Ideal if you are an aggressive investor: You have a win big or go home attitude
- When demand is high, low liquidity can drive small-cap NAVs higher faster
- They usually offer healthy returns in the long term
Should You Invest in Small-Cap Funds?
To tell you whether you should invest in Small-Cap funds a lot more information is required. You should never pick mutual funds to invest in on your own. Always consult a financial advisor or Wealth Coach for this purpose. You can also try Cube Wealth’s QuickSIP feature to check which funds suit your risk appetite.SPEAK TO A WEALTH COACHSTART A QUICK SIP
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