These funds invest minimum 65% of its assets in small cap companies. The minimum investment horizon is 10 years.

What are Small Cap Funds?

Small cap funds invest in the companies ranking below 250 on the stock exchange by full market capitalization. These funds are relatively riskier and volatile than mid-cap and large-cap funds. However, they promise a higher return in the long-run.

As small companies have a huge prospect to grow, investors can grow their money by considering this type of investment. There are high chances of investment getting two folded or even triple-up in a brief period of time. It is always advisable to keep a small bit of the investments in small-cap funds, if the investor is not a risk-taker.

What are the benefits of investing in small cap funds?

The investor can look-up for small cap funds for various reasons. Small-cap funds can be purchased at a minimum value with high prospects of growth. If the investor is seeking a long-term investment, small-cap funds are the ideal option. However, one should always watch the performance of the fund before deciding on investing.

Small-cap funds can yield a high rate of returns, if invested for long-term. These funds yield high returns but can also become risky bets. Hence, investors who are willing to take high risks can invest in these funds.

Is it advisable to invest our entire retirement corpus in these funds?

Small-cap funds can be quite unnerving for entire retirement corpus. During the 2008 crisis, small-cap funds went down by 80%. Whereas, large cap funds went down by 50%. Meaning, small-cap investment of ₹10,000 went down to ₹2,000 and that of large-cap went down to ₹5,000. However, this period lasted just for a year and a half.

It is the game of one’s psychology while investing the entire retirement corpus. However, it is not advisable to invest the entire retirement corpus in small-cap funds. A mix of multi-cap fund portfolio with 10% of allocation in small and mid-cap funds works well in the long period of time.

Why small cap funds are must for young investors who are in 30’s?

Small-cap funds are an ideal long-term equity instrument that can be invested for specific investment goals. Young investors in their thirties might have various such investment goals such as children’s education, their marriage, retirement plan, and more. These funds can help young investors reach their long-term goals efficiently.

High risk is attached to small-cap funds. It is not difficult for young investors to take high risk in order to yield high returns from these funds. Thirties is the ideal age to take maximum risk on investment and yield a large chunk of money later. Also, know your risk appetite before allocating money to these funds.

Is it advisable for the person to invest his entire savings in small cap funds?

There are various factors that need to be considered while planning investments. These factors include:

Age : Understanding how much risk the investor can take based on his age helps to attain the financial goals effectively. Investors between the age of 25-40 can take high to moderate risk depending on their willingness. Whereas, investors above 40 should take moderate to low risk.

Financial Goals : Investment is attached to the financial goals of the investors. Knowing whether the investments are for long-term or short-term can help in planning.

Returns : Since a couple of years, the market is performing exceptionally well and has attracted a lot of investors. Small-cap funds are also presumed to have high potential of growth and returns.

There are other factors such as risk and tax that helps in investment planning. All these factors together when studied extensively help investors in deciding whether the person should invest his entire savings in small cap funds.

Which is better funds to invest: large cap or small cap funds?

Large-cap funds tend to grow at a slower pace than small-cap or mid-cap funds. However, investors might struggle for liquidity in small-cap funds. Whereas, it is the other way round for large-cap funds. It depends on the above-mentioned factors, whether the investor would like to invest in large-cap or small-cap funds.

Large-cap funds tend to be less volatile than the other two types. Also, the risk potential in large-cap funds is much less than small-cap funds. Hence, investors willing to take higher risk can opt for small-cap funds. There is no such concept like better funds, it’s the investor risk profile, liquidity needs, financial goals which helps in deciding the suitable fund.

Further Reading

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