As per SEBI’s mandate, small-cap funds must invest at least 65% of their assets in small-cap stocks. The balance can be invested in large-cap, midcap, and other assets. These funds invest across industry sectors to diversify risks.
251st company onwards in terms of full market capitalization are known as small-cap stocks. Small-cap stocks are perceived to be riskier than large cap and midcap stocks, but they have higher returns potential than midcap and large-cap stocks in the long term.
The small-cap mutual funds try to take advantage of such companies. Here is a detailed guide on small-cap funds and their advantages.
These mutual funds invest in companies from different industrial sectors like IT, banking/financial, Pharmaceutical & FMCG, etc. Thus it can help in the diversification of your mutual fund portfolio with small-cap exposure into various sectors.
Investors can also opt for passive investment opportunities i.e. Small-cap Index funds & reduce the risk of the portfolio.
Important Things to remember while investing in small-cap funds:
While a small-cap fund does have excellent potential, there are few important factors that an investor should know before investing.
Small-cap funds invest primarily in small-cap companies & they are risky and highly volatile by nature. Thus, NAV can fluctuate wildly during volatile markets.
Long term investment horizon:
Most small companies require a lot of time to witness significant growth. Thus, these funds are ideal for long-term investors i.e., the Investment horizon should be more than 5 years.
Suitable for Aggressive risk profile:
Small-Cap Funds are suitable for investors with an Aggressive risk profile as they can generate high returns at the cost of high risk & volatility.
Portfolio composition matters:
Small-cap companies do have great potential for growth but they also carry a significantly higher level of risk. Hence, check the composition of the fund thoroughly before making any investment decision & prefer funds from reputed fund houses with experienced fund managers.
Remember, investing in small-cap funds can boost your portfolio returns significantly. Invest in small-cap funds with us.
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