Things You Need to Know About Small-Cap Mutual Funds

When it comes to investing in mutual funds, there are many options available, such as large-cap, mid-cap, small-cap, debt funds, equity funds, and more. It may be intimidating for a novice investor to select the ideal fund that meets their financial goals.

To make the process easier, we glance at Small- Cap Mutual Funds and cover their features.

What are Small Cap Mutual Funds?

A small-cap mutual fund is a category of equity mutual funds that invests in small-cap stocks. As per SEBI, at least 65% of the holdings of these funds should be allocated to small-cap stocks,

Small caps are companies that have the potential to grow and give higher returns in the future. They also have inherently higher risk because of a volatile stock price and limited information.

Reasons to Invest in Small Cap Mutual Funds

Portfolio Diversification

It’s an old saying, ‘Never put all your eggs in one basket,’ which means you must diversify your portfolio into different assets. If you have already invested in a different category of mutual funds, investing in small-cap stocks can give you returns in the long term and can be a good choice for capital appreciation.

Long Term Investing

If you are a long-term investor, investing in small-cap mutual fund can be beneficial as small-cap companies have growth potential. Small-cap companies can become mid-cap or large-cap companies in the future.

Undervalued Stocks

Fund managers often look for undervalued stocks and invest in companies with the potential to become mid / large cap in the long term, which can give returns.

Things You Need to Know Before Investing in Small-Cap Mutual Funds

Before you start investing in small-cap mutual funds, you should consider these factors:

Selection of the Right Fund

Investing in a small-cap fund needs more research and attention than mid-cap or large-cap funds because these funds have a higher risk. Hence, you must do a complete study of the Asset Management Company’s fund with a proven track record.

Diversify Your Portfolio

Small-cap mutual funds have potential to give high returns with very high risk over the years but should not be the only fund category to park your savings. It’s advisable that you also invest in different assets or categories of funds to diversify your portfolio so that if the small cap fund you invested in does not perform well, it can be diversified with other investments.

Risk Appetite

If you have just started earning, and do not mind taking a higher risk, you can invest in small-cap funds, so your investment gets appreciated over the years.

SIP

Small-cap funds are ideal for starting a monthly Systematic Investment Plan (SIP) because you can smartly invest a fixed amount every month in small-cap funds and reap returns in the long term.

SIPs are ideal for small-cap mutual funds because small-cap stocks are more volatile, and you can average your returns by investing in different market conditions every month, also known as Rupee Cost Averaging.

Expense Ratio

The expense ratio is the fees the fund houses charge to manage the funds. This includes transaction costs, fund managers fees, marketing expenses, etc. A higher expense ratio can eat up your returns over the years. You can compare the expense ratio of similar funds by different AMCs before selecting the best small-cap fund.

Know Your Investment Goals

You must know your investment goal before investing in any small-cap mutual funds. If you are investing for a short term, small-cap mutual funds are not ideal for you because they may fluctuate with market fluctuations and hamper your returns. This is ideal for long-term investors with an investment horizon of five years or more.

How to Invest in the Best Small Cap Mutual Funds?

Step 1: Research a Fund to Invest

First, you need to research for small-cap mutual fund for you. You can select funds based on performance, mutual fund goals, fund managers’ experience, expense ratio, and more.

Step 2: Decide an Amount to Invest

Ideally, you should not invest all your investment into small-cap mutual funds because they are risky. However, before investing, you must decide an amount to start investing.

Step 3: Investment Method

You can invest from Asset Management Company’s website or mobile applications. You just need to complete a Know Your Customer (KYC) process, and then you will be all set to start investing. You can invest in Direct Plan through direct platforms as there is no distribution commission charged.

Step 4: One Time or SIP

Once you decide the amount to invest, you must determine if you want to invest every month in the same fund or want to start an SIP. By starting an SIP, you get disciplined in investing and investing regularly without timing the market conditions, which averages out our returns in the long term.

Step 5: Review Your Portfolio Regularly

Once you find and start investing in small cap mutual funds, it is also crucial to review your portfolio regularly. You must review at least once in a year to check if your investments meet your financial goals.

Conclusion

Investing in small-cap funds can be beneficial, provided you invest regularly in them. However, it is crucial to understand everything about the fund before investing. If required, you must seek professional advice.

Frequently Asked Questions (FAQs)

Who should invest in mutual funds small-cap?

Ideally, if you are a long-term investor with an investment horizon of five years or more and do not mind taking a higher risk, investing in a small-cap mutual fund can potential to give high return with high risk in the long term.

What are the benefits of investing in small-cap mutual funds?

Small-cap mutual funds have a potential for growth as small companies can become mid or large-cap companies and potential to give high return with High Risk.

How many small-cap mutual funds should I invest in?

You can invest based on your investment objectives and goal. There is no limit or guideline for this, but it’s advisable that you diversify your portfolio into different assets classes.

Above article is authored by Quantum.

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