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    Small Cap Funds – Small Cap Mutual Funds to Invest in 2023

    Small Cap Funds

    Small-cap funds are known for their high-return generating potential but also notorious for their high-risk nature. Learn how to identify top small-cap funds for your portfolio.

    What are Small Cap Funds?

    Mutual funds investing at least 65% of their total assets in small-cap companies are known as small-cap funds. The SEBI (Securities and Exchange Board of India) guidelines define small-cap companies as those ranked beyond 250 in terms of market capitalization in the stock exchanges.

    How Does a Small-Cap Fund Work?

    Small-cap equity funds have large exposure in relatively small listed companies. Small-cap companies typically have a relatively small size and operation than the top companies. The general awareness about them can also be low compared to the big established names in the market.

    However, these companies carry the potential to grow significantly if the market conditions are conducive and the management is competent. So, the small-cap mutual funds that invest in these companies can have the potential to outperform the returns generated by other mutual fund types, especially in a bull market cycle. However, due to the high level of volatility involved, it is advised to include small-cap funds carefully after analyzing your risk profile.

    Also Read: Types of Mutual Funds

    Who Should Invest in Small-Cap Funds?

    Online is the quickest and most hassle-free way to invest. First, select the mid-cap fund you want to buy. Next, choose between growth and IDCW and finally, the investment route (SIP or lumpsum). Once you have made these decisions, set up your account and start investing.

    • 1.Aggressive Investors

      Small-cap companies are often the ones that face most of the heat during a financial crisis or economic slowdown. So, investing in small-cap equity funds that invest in these companies can have some inherent risks.

      But these high-risk also mean a high-return potential. So, small-cap funds can be suitable for investors with a high-risk appetite. .

    • 2. Investors Eying for Long-Term Capital Appreciation

      Small-cap funds can be highly volatile in the short term. However, they are known to provide good returns if you stay invested long-term. Therefore, these funds can be suitable investments if you stay invested for 7-8 years or even longer.

    • 3. Younger Investors

      Individuals below the age of 40 typically have a long working life ahead. So they can invest for a long period. Moreover, young people have the time on their side to remain patient in a volatile market. Therefore, a young age can be ideal for having suitable exposure to small-cap funds.

    How to Invest in Small-Cap Funds?

    You can purchase all the top small-cap funds online, which is arguably the easiest way to invest these funds.

    • 1. Visit the official website of the fund house.

    • 2. Choose the small-cap fund you want to invest in.

    • 3. Select between Growth and IDCW plans.

    • 4. Choose between the Lump sum or SIP (Systematic Investment Plan).

    • 5. Enter personal details like name, date of birth, PAN, Aadhar, etc.

    • 6. Pay the requisite amount to complete the buying process. In the case of SIP, select the SIP amount and the investment frequency carefully. You can change them later when your investment capacity increases over time.

    • 7. The fund house will confirm the transaction and inform you of the mutual fund details through an official email.

    6 Things to Consider Before Investing in Small-Cap Funds

    • 1. Investment Goals

      Each individual can have different investment goals. So, it’s important to understand your financial goals. For example, small-cap funds can be a good investment option if you’re ready to keep your investments untouched for 7-10 years for a potentially inflation-beating return.

      Reading the scheme information document can be a good way to understand the investment objective of a fund and see whether it aligns with your investment goals.

    • 2. Total Expense Ratio

      Every fund house charges a fee known as the Total Expense Ratio (TER) to cover the cost of managing the mutual fund scheme. TER can vary between schemes. As per SEBI rules, a fund house can’t charge more than 2.25% as TER on equity funds.

      A low-expense ratio is desirable as it can affect the percentage of return. However, consider additional factors as well, such as the fund’s track record, the fund manager’s performance, etc.

    • 3. Fund Manager’s Experience

      The performance of a mutual fund can depend a lot on the fund manager’s investment decisions. This becomes more important in small-cap equity funds that are known to experience greater levels of volatility.

      Therefore, it’s crucial to know the credentials of the fund manager running the fund. Apart from the qualifications and accolades, the fund manager should have adequate experience handling small-cap funds across different market cycles.

    • 4. Standard Deviation

      The standard deviation is a percentage that can be used to see how much a mutual fund’s return can deviate from its expected average annual returns based on its historical performance. So, a higher standard deviation can indicate higher volatility. For example, a fund with a standard deviation of 3 can be considered less volatile than one with a standard deviation of 4 or higher.

      However, use standard deviation as a research tool and not an absolute performance metric. Consider it along with other factors like the fund’s historical average return and your risk appetite.

    • 5. Past Performance of the Fund

      While a fund’s past performance can’t predict its future returns, it can help in estimating the fund’s future return potential. Especially you can get a clearer picture of the fund’s performance if you compare its past returns with the returns generated by its underlying index during the same period.

    • 6. Income Distribution Cum Withdrawal (IDCW) Vs Growth

      When investing in a small-cap fund, you can either opt for IDCW Plan or the Growth plan. While both have got their merits, a Growth plan may be a better choice when it comes to small-cap equity funds. This is because the investment horizon of small-cap funds is usually long, as stated earlier. A Growth plan can help you benefit from the power of compounding, leading to potentially long-term wealth creation.

    FAQ's

     

    Small-cap funds are mutual funds with large exposure to small listed companies. These companies can be agile and respond swiftly to changing business scenarios due to their small size. Therefore, small-cap funds with exposure to these companies can benefit from the rapid growth potential of small-cap funds.

    While it is advisable to stay invested for a long period, the actual investment tenure can largely depend on your investment goals, risk profile, and other factors.

    For example, you may like to invest more in small-cap funds if you get significant salary appreciation. On the other hand, you would probably think of lowering your risk exposure in a small-cap fund if you lean toward fixed returns in the future.

    Investing in equities always carries a certain degree of risk. The risk is certainly higher in small-cap funds than the large or mid-cap funds. However, a calculated risk can help you generate inflation-beating returns in the long run.

    List of Funds in Small Cap Fund

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