What Are Small-Cap Funds?

Small-cap funds are those funds which primarily invest in stocks of small companies which have the potential of growing their business and thereby value for their investors. These funds can be risky bets if an investor is investing for the short term. These are the future mid and large companies.

In the recent recategorization of mutual fund schemes by SEBI, these schemes are mandated to invest at least 65% of the AUM in 251st onward companies in terms of full market capitalization.

Why Small-Cap Funds?

Small-cap funds can provide wings to your wealth as these funds have the potential of generating exceptional gains. These funds can really make a difference to your total wealth as these can generate returns of over 20% in the long term.

Should I Invest In Small-Cap Funds?

If an investor is looking for higher returns and is comfortable with the underlying risk of these schemes then he must invest in such schemes. One can take an exposure of around 20-30% in these funds. This can boost the overall portfolio and can create huge wealth.

What All Things Should I Consider Before Investing In Small-Cap Funds?

Risk

Any investor should not invest in equities or equity mutual funds just for the sake of earning high returns without knowing his risk profile. This is probably not the right way to invest. One should always consult an advisor before making any investment if they are not sure about anything related to investments.

Time horizon

Though there is as such no lock-in period in case of small-cap funds, however, it would be better if an investor remains patient and invest for a longer period (10 years or more).

Expected returns

Small caps are known for the returns they generate. One can expect to earn returns of over 20% over a period of time.

Goals to be achieved

Every individual must align his goals to his investments. No one should make the investment just by getting attracted towards mouth-watering return generated by small-cap funds in the past.

Which Is Better Small Cap Funds Or Large Cap Funds?

Large-cap funds invest in bluechip companies while small-cap funds invest in small companies which have the potential to grow in future. Small-cap companies are the future leaders of the economy.

Large-cap funds generate a reasonable rate of return and downside is limited in such funds. While on the other hand small-cap funds generate much better returns than large-cap funds, however, these funds fall the most during the bear market phase.

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