Small Cap Mutual Funds

Mutual fund schemes that invest in stocks of firms whose ranks in terms of market capitalisation range between 1 and 100 are known as large cap mutual funds. These funds are the least volatile and are known to deliver steady returns. Mid cap mutual funds, on the other hand, are mutual fund schemes that invest in stocks of firms whose ranks falls between 101 and 250.

Who should invest in small cap mutual funds?

Small cap mutual funds are ideal for investors who:

1. Have a high risk-taking capacity.
2. Prefer to invest in small cap companies due to their high growth potential.
3. Wish to invest for a long term horizon, say, at least, for 7 to 10 years.
4. Desire attractive returns on their investment.

Benefits of investing in small cap mutual funds

Over a long term investment horizon, small cap mutual funds have been known to deliver high returns since their underlying small cap stocks have a high growth potential. The fund manager of the small cap funds allocates around 65% to 90% of the investments in such stocks to generate capital gains.

Things to keep in mind before investing in small cap mutual funds

1. Risk - Small cap funds suffer a lot when the market is not performing and hence, it is recommended that you invest in them only if your tolerance towards risk is high.
2. Cost - Since fund houses will charge you a fee known as an 'expense ratio' to manage your funds, you should shortlist a fund that has a lower expense ratio. A lower expense ratio translates to better returns over a long investment horizon.
3. Returns - As stated earlier, small cap mutual funds have the ability to fetch really desirable returns when invested over an investment horizon ranging between 7 years and 10 years.
4. Investment horizon - For a small cap fund to yield optimal returns, you should invest in it for at least 7 to 10 years. This is because small cap funds tend to be more vulnerable to market fluctuations which can be balanced out only when the money remains invested for a longer duration.
5. Financial goals - Small cap mutual funds are appropriate for you if you have long-term goals to meet such as saving up for retirement, children's education, taking an exotic vacation, etc., due to their ability to generate optimal capital gains.