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Should I invest in small cap funds?

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Mridul Agrawal

A category of the equity funds, in small cap funds, a large portion of investment is done in small cap stocks i.e. in companies with small market capitalization- having a market cap of less than ₹ 500 crore. Small cap funds are highly risky and volatile investment instruments as compared to large and mid-cap fund category due to their exposure in high performing equities. These funds have an objective of seeking capital appreciation through investment in high growth stocks.

Small cap funds are suitable for investors who are willing to take high amount of risk with their capital, have longer time horizon for their investments and are looking for higher returns compared to blue-chip companies. Also it is advisable to invest through SIP route as you will be able to derive the benefits of rupee cost averaging, your investment will not be skewed towards one side in the economic cycle and you can invest a part of your income every month without feeling any financial burden.

Devanshu

Small cap funds are funds which invest a major component of investor’s money in small cap stocks. These funds have an objective of seeking capital appreciation through investment in high growth stocks.

Investing in small cap funds gives investors a chance of earning very high returns which usually range between 15-20% and it is not uncommon for them to go as high as 25% and even 30% in some cases in the long term but the tenure of investment also needs to be considerably large to avoid any losses in short term due to normal fluctuations and movements in business cycles.

Small cap funds are suitable for investors who are willing to take high amount of risk with their capital, have longer time horizon for their investments and are looking for higher returns compared to bluechip companies.

Yes, you can definitely invest in small cap funds if your investment criteria matches with the above stated objectives and you already have investments in other large and mid cap funds or in other asset classes like fixed deposits, gold, real estate etc.

Also it is advisable to invest through SIP route as you will be able to derive the benefits of rupee cost averaging, your investment will not be skewed towards one side in the economic cycle and you can invest a part of your income every month without feeling any financial burden.

Pijush Kanti Biswas

In small cap funds, a large portion of investment is done in companies with small market capitalization i.e. having a market cap of less than INR 500 crore. Most of small cap funds invest around 60-90% in small caps and rest in mid-caps and large caps to provide some stability to the investment. Small cap funds are highly risky and volatile investment instruments as compared to large and mid-cap fund category due to their exposure in high performing equities. These funds have exponential growth potential and give high returns on investment and is best suited for investors with high risk appetite or for seasoned investors.

If you are an experienced investor and have a sound knowledge of investment in mutual funds then go ahead for small cap funds, keeping both advantages and disadvantages in mind. But investors should think of investing for long-term in small cap stocks as it has been observed that these companies take 3 to 4 years to show superior performance. Best part of small caps funds is that they are underfollowed in stock market and usually untapped by institutional investors, giving a huge opportunity to wise investors to grow their investment quickly.

But if you are a beginner to investment in mutual funds, especially in equity mutual fund, thinking of the small mutual funds may not be the best idea for you. These are best for investors who have very good ideas of mutual funds and the risks associates with them. To ensure that the fund is in good hands, choose a fund house having fund manager with good amount of experience managing small cap funds and associated with these funds for some good numbers of years.

To know more about various advantages and disadvantage check out https://groww.in/questions/what-are-the-advantages-and-disadvantages-of-small-cap-funds


Happy Investing!

Kavita Soni

Small cap funds are the funds of companies with lower market capitalization. Market capitalization range for small cap funds is different among different brokerages. However, there is no consensus about what a small cap company is in terms of actual value. 

Should one invest in small cap funds is governed by many factors which include fund available for investment, risk appetite of investor, aim for short or long term investments and the need of aggressive or steady returns. Taking decision based on these factors become more difficult when the chosen funds are frequently affected by market economic conditions. Small cap funds being volatile in nature are reflect frequent fluctuations in their performance.

There are multiple advantages of investing in small cap funds as these funds provide significant growth potential, which is not achievable in steadily growing large cap funds. Returns from small cap funds increase with the increase in the market share of small companies when they either introduce new products or expand the existing market geographies. Mergers and acquisitions are another opportunities which can lead to increase in the value of small cap funds.

Despite these advantages of small cap funds, one must be careful in consideration of below points before starting the investment:

  1. Research: Prefer funds which have good track record over the years. Check at least past 5 year's performance
  2. Invest for long term OR focus on long-term gains: As small cap funds are volatile, one may not observe growth in short run, hence investing for a longer time is essential to know the growth pattern of the fund
  3. Check risk appetite: If one does not have the financial cushion to handle the fluctuating economic conditions, then it is advisable to not go for small cap funds
  4. Diversify the portfolio: If small cap funds are hit by the market conditions, one should be ready to bear the loss by keeping a mix of mid cap and large cap funds in the portfolio

If you are not sure on the amount of investment and diversification of the portfolio, then feel free to contact mutual fund experts before putting your money into any category of fund.

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.
Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, investment goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs.
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