Mutual fund investing is among the best strategies to increase wealth. Small-cap funds are gaining popularity among the various mutual fund types available in India. These funds focus on investing in small-sized companies that can grow rapidly and deliver high returns.
However, small-cap funds also come with a higher risk level than large-cap or mid-cap mutual funds. We will examine small-cap funds’ definition, salient characteristics, and advantages for investors in this blog.
What are Small Cap Funds?
Equity mutual funds that primarily invest in small business equities are known as small-cap funds. Companies in India are categorised as small-cap companies if their market capitalisation is less than ₹5,000 crore. These are generally emerging businesses in the early stages of growth. They may not have the established market presence of larger firms, but they possess strong potential for expansion and profitability.
Investing in small-cap funds allows you to gain exposure to these smaller, often lesser-known companies. While they carry a higher risk due to market volatility, they also have the potential to deliver substantial returns if these companies grow as expected.
Features of Small Cap Mutual Funds
Now that we know about small-cap funds, let’s explore their key features:
High Growth Potential
The primary feature of small-cap funds is their focus on growth. Small-cap companies are in the early stages of their business journey. They often have more room to grow than larger, more established firms. If these companies succeed, the returns on your investment can be substantial.
High Volatility
Small cap mutual funds are more volatile than large-cap and mid-cap mutual funds. The stock prices of small-cap companies can fluctuate significantly due to market conditions, company performance, and economic factors. This volatility can result in both higher risks and higher rewards.
Long-Term Investment Horizon
Long-term investors who want to remain invested for at least five to seven years are the ideal candidates for small-cap funds. The growth potential of small-cap companies may take time to materialise, so a longer investment horizon can help you ride out short-term market fluctuations and benefit from the overall growth of these companies.
High Risk, High Reward
Investing in small-cap funds involves taking on a higher level of risk. These companies are often young and may not have the same level of stability as larger firms. However, if you are willing to take risks, the rewards can be significant, as small-cap companies can deliver impressive returns.
Advantages of Small Cap Mutual Funds Investment
Let’s take a look at some of the key benefits of investing in small-cap funds:
Opportunity for High Returns
Small-cap funds offer the potential for high returns due to their focus on rapidly growing, smaller companies. If you invest early in a small-cap company that becomes successful, the returns can be much higher compared to large-cap or mid-cap mutual funds.
Diversification
Adding small-cap mutual funds to your investment portfolio can provide diversification. These funds typically invest in a wide range of small-cap companies across different sectors, reducing the risk associated with individual stocks. Diversification helps balance your portfolio, especially when combined with large-cap and mid-cap mutual funds.
Early Investment in Emerging Companies
Small-cap funds give investors the opportunity to invest in companies that are still in the early stages of their growth journey. If these companies perform well, early investors can benefit from the rapid expansion and success of these businesses.
Rupee Cost Averaging with SIP
One of the most popular ways to invest in small-cap funds is through a Systematic Investment Plan (SIP). With SIP, you invest a fixed amount regularly, such as every month.
This approach helps you take advantage of rupee cost averaging, where you buy more units when prices are low and fewer units when prices are high.
It reduces the impact of market volatility and can lead to better long-term returns. You may quickly determine the monthly investment amount required to reach your financial objectives by using a SIP calculator.
Final Word
Small-cap mutual funds offer a unique opportunity to invest in high-growth, emerging companies in India. While they come with higher risks, the potential for substantial returns makes them an attractive choice for investors looking for long-term capital appreciation. By using an SIP calculator, you can plan your investments effectively and track your progress toward your financial goals.
If you are willing to take on the risk and have a long-term investment horizon, small-cap mutual funds can be a valuable addition to your investment strategy, helping you build wealth and achieve your financial objectives.
