Features and Benefits of Small Cap Mutual Fund

Features and Benefits of Small Cap Mutual Fund

292 Views

All companies whose estimated market value falls within the top 250 are invested in small-cap funds. Though they may offer relatively higher long-term returns, these funds are riskier and more volatile in the short to medium term than other equity-focused funds. The value of these companies’ shares can soon double or triple. Let us look into this article to understand more about the small cap mutual funds.

What Are Small Cap Funds?

Small-cap funds primarily allocate a significant portion of their investible corpus to equity or equity-related instruments of small-cap companies. According to the Securities and Exchange Board of India (SEBI), small-cap schemes are required to invest a minimum of 80% of their total assets in small-cap companies. SEBI defines small-cap companies as those ranking below the 250th position in terms of market capitalisation, with these companies having a market capitalisation of less than Rs. 5000 crores.

It’s crucial to emphasise that small-cap funds come with a heightened level of risk. Even minor market volatility can exert a substantial impact on the share prices of small-cap companies. Despite the elevated risk, these stocks may have the scope to carry considerable potential for delivering returns. Consider the scenario where a small company experiences substantial growth – the corresponding increase in share prices can be dramatic.

However, it’s noteworthy that many investors may be drawn to small-cap schemes for short-term investment goals. This approach can be counterproductive since small companies typically require time to achieve significant growth. Consequently, individuals often opt for small-cap funds if they possess a higher risk tolerance and a longer investment horizon.

Features of Small Cap Equity Funds

Key attributes of small-cap funds include:

  • Investment Horizon:

Small-cap stocks demonstrate heightened sensitivity to market fluctuations, making them particularly susceptible during market downturns. Therefore, it is essential to adopt a long-term investment perspective when investing in Small-Cap Funds. This extended timeframe, ideally spanning eight to ten years, allows ample opportunity for investments to yield returns, making these funds well-suited for long-term investors.

  • Risk Tolerance:

Small cap funds may likely present a potential for surpassing benchmark returns, but they come with elevated risk levels. These investments may be considered by individuals who can withstand the inherent price volatility associated with small-cap stocks. To manage risk, investors may allocate a small portion of their portfolio to small-caps, maintaining a long-term investment horizon to enhance wealth creation over time.

These are the primary features that define a small-cap mutual fund.

Benefits of Small Cap Mutual funds

Explore the advantages of investing in small-cap funds:

  • Reliable Return Potential:

Small-cap funds in India may be seen to have the potential to yield reliable returns compared to large-cap funds. Investing in smaller companies with substantial growth potential may help to create wealth. Historical examples include companies like Britannia, Lupin, and Titan, which transitioned from small caps to large caps, generating substantial wealth.

  • Independence from Institutional Influence:

Many small-cap stocks are overlooked by large institutions due to limited liquidity. This characteristic allows these stocks to move based on their own merits, increasing the likelihood of organic price rises. This independence can contribute to the attractiveness of small-cap investments.

  • Diversification of Risk:

Small-cap funds provide essential diversification in portfolios dominated by large-cap and index companies. By investing in companies across various industrial sectors such as IT, banking/financial, automotive, FMCG, and more, these funds have the potential to offer a relatively risk-diversifying strategy. Additionally, small-cap stocks often exhibit a lower correlation with index stocks.

Investing in small-cap funds in India presents a potential for considerable returns, the independence of stock movement, and valuable risk diversification in investment portfolios. Explore the Axis Direct MF App for a seamless learning experience from stock market investing basics to mutual funds and advanced options courses, all while conveniently monitoring your orders in real-time.

Conclusion

Investing in small-cap mutual funds in India may have the potential to offer investors a clear opportunity for capital appreciation. With a focus on smaller companies poised for growth, these funds may have the potential to outperform large-cap counterparts. Furthermore, including small-cap funds in a portfolio may provide risk diversification, as these investments span various sectors and exhibit a lower correlation with index stocks. While the risks are higher due to market volatility, for investors with higher risk tolerance and a long-term perspective, small-cap mutual funds can be seen to represent a strategic avenue to explore the potential of robust wealth creation.

Finance