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.
Advantages of small cap funds:
1. Small cap fund have exponential growth potential and give high returns on investment if right stocks are picked from small cap segment.
2. Small cap stocks provide good room for diversification in fund’s portfolio as during the investing periods it often happens when large cap stocks don’t perform and small cap stocks grow quickly.
3. They are underfollowed in stock market and usually untapped by institutional investors, giving a huge opportunity to wise investors to grow their investment quickly.
Disadvantages of small cap funds:
1. 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.
2. These funds are not suited for all investors. Small cap funds are best suited for investors with high risk appetite or for seasoned investors.
3. Success of these funds depends on the amount of time invested by fund house in researching and finding the right dark horse stocks in small-cap segment. So, selecting right fund house with shrewd fund manager is the key.
4. It is hard to find dividends among small cap funds though a lot of small cap companies do pay dividend.
5. Timing of buy and sale of these funds is very critical.
If you 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.
Advantages of small cap funds are:
Disadvantages of small cap funds are: