Small cap funds are open-ended equity funds that invest in stocks of smaller companies with a market capitalisation of less than Rs. 5000 crores. A company’s market capitalisation refers to its outstanding share’s total market value. In addition, small cap fund target companies ranked beyond the top 250 in terms of overall market capitalisation.
Small-cap fund invests at least 65% of the total assets in small-cap stocks. This fund aims to harness the potential growth of young companies. However, the high risk associated with this fund makes it essential for investors to consider a few things before investing. To assist you in selecting a small cap fund, this article outlines factors to consider while choosing a small-cap fund.
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How to Select a Small Cap Fund?
While choosing the small cap fund, consider the following points:
- Understand the Risk and Growth Potential
As mentioned above, small cap funds primarily invest in small-sized companies. Although they present an opportunity for seeking growth prospects, the risks associated with them are relatively high. Thus, it is vital to understand the risks and potential growth offered by the stocks in the fund’s portfolio before investing.
- Fund Manager Experience
Fund managers play a crucial role in driving the performance of a mutual fund. They are responsible for carefully selecting the stocks, portfolio management and more. In addition, they can assist in navigating challenges and opportunities associated with investing in smaller companies. This makes it crucial for investors to properly research regarding the fund manager’s experience and pick a fund with a worthy manager.
- Expense Ratio
The expense ratio is the annual maintenance charge levied by a mutual fund to finance expenses. You need to consider this ratio while selecting a fund because a higher expense ratio can reduce your overall returns. In contrast, a lower expense ratio can help maximise your returns. So, while making the decision, remember to compare the expense ratio of multiple funds.
- Diversification
In diverse market conditions, a well-diversified portfolio can help to mitigate risk and enhance gains. Investing in a small-cap fund with a diversified portfolio of stocks can help you tap the potential of the company and lower risk during fluctuations.
How to Invest in a Small Cap Fund?
A systematic investment plan (SIP) and a lump sum investment are two ways to invest in small cap funds. In SIP, you invest a fixed amount regularly at specific intervals. For example, you can invest Rs. 1000 every month in a small cap fund of your choice for years until you decide to stop. Furthermore, SIP is known for its rupee-cost averaging approach. This approach means you buy more units when prices are low and fewer units when prices are high. This means, in the end, your investment costs are averaged out over time.
In lump sum investment, you invest in a mutual fund at once. This is advantageous if you have bulk money. However, this method does not offer benefits like rupee-cost averaging. In addition, it may not always suffice to invest money only once. So, while chasing a financial goal, a steady and disciplined approach is considered suitable. However, it is up to investors to decide on the investing method based on their financial goals, time horizon, and risk appetite.
Why Should You Invest in Small Cap Fund?
There are many advantages to investing in small cap mutual funds, including:
- High Returns: Small cap mutual funds may generate higher returns than mid-cap funds or even large-cap funds. This is due to these companies’ strong growth potential.
- Diversification Opportunity: A mutual fund that invests in small companies can help you diversify your financial portfolio. As a result, your risk of investment is lower and your chances of being protected are higher even when the market suffers a setback.
It may be beneficial to invest in small cap mutual funds if you are willing to take some risks in order to maximise your portfolio. A number of these funds are known for their ability to produce significant returns even during difficult markets. However, the downside of these funds is that they may suffer severe losses in the event of a market decline. You can consider using a mutual fund app to simplify the investment process. With these apps, you can monitor and manage your investments with a user-friendly interface, real-time updates, and tools.
Conclusion
Small cap funds should be selected carefully based on your financial goals, risk tolerance, and investment preferences. To make informed investment decisions, it is essential to understand small-cap stocks’ inherent risks and growth potential. While investing in smaller companies, the track record and experience of the fund manager are crucial. Also, opt for funds with lower expenses to maximise your gains. When markets are volatile, diversifying the fund’s portfolio is crucial to minimising risks and maximising gains.
Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.
Statutory Disclaimer: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.
Past performance may or may not be sustained in future.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
Market caps are defined as per SEBI regulations as below: a. Large Cap: 1st -100th company in terms of full market capitalization. b. Mid Cap: 101st -250th company in terms of full market capitalization. c. Small Cap: 251st company onwards in terms of full market capitalization.
