Features and Benefits of Small-Cap Mutual Fund
Best small-cap mutual funds are a popular choice for investors who want high growth over the long term. These mutual funds invest in small-cap companies with a smaller market capitalization but big growth potential.
If you are wondering what small-cap mutual funds are, they are equity mutual funds that mainly invest in small companies that have the potential to grow faster than large companies.
Investors interested in high returns often look for the best small-cap mutual funds to take advantage of emerging companies that can turn into market leaders in the future.
What Are Small-Cap Funds?
Small-cap mutual funds invest primarily in stocks of small-cap companies. These are firms that have a smaller market capitalization compared to mid-cap and large-cap companies.
Small-cap companies usually have a market capitalization below ₹5,000 crore. Investors interested in high-growth opportunities often look at small-cap mutual funds because they offer the chance for substantial long-term gains.
Key Features of Small-Cap Mutual Funds
The key features of small-cap mutual funds are
- High Growth Potential: The main feature of small-cap mutual funds is their high growth potential. Small-cap companies have the capacity to grow faster than large companies because they are in the early stages of their business cycle.
- Higher Risk: Small-cap companies are more volatile. Their stocks can rise and fall more sharply compared to large-cap stocks. The risk of investing in small-cap mutual funds is higher, but so is the potential reward.
- Diversified Investment: Small-cap mutual funds invest in a variety of small companies from different sectors. The diversification helps reduce the risk associated with investing in just one company or industry.
- Professional Fund Management: These funds are managed by professional fund managers who research and select the best small-cap mutual funds in India. Their expertise helps in selecting promising small-cap companies that can deliver good returns.
- Liquidity: Investors can buy or sell units of small-cap mutual funds easily on any business day, making them more liquid than directly investing in small-cap stocks.
Benefits of Small-Cap Mutual Funds
The benefits of small-cap mutual funds are:
- Potential for High Returns: The most attractive benefit of small-cap mutual fund returns is the opportunity for high returns. Small-cap companies have room to grow and can outperform larger companies over the long term.
- Tax Efficiency: Gains from small-cap mutual funds held for over one year are considered long-term capital gains in India. It makes them tax-efficient for long-term investors.
- Access to Emerging Companies: Small-cap mutual funds give investors exposure to emerging companies with innovative products and services. These companies are often not listed on the stock market indexes yet.
- Professional Management: By choosing the best small-cap mutual funds in India, investors benefit from professional management and research, making it easier to invest without needing to pick individual stocks.
- Diversification Reduces Risk: Investing in a single small-cap company is risky. A small-cap mutual fund spreads the investment across many companies, reducing individual company risk.
Who Should Invest in Small-Cap Mutual Funds?
The following investors can benefit from investing in small-cap mutual funds:
- Young Investors: Those who have a long investment horizon and can withstand market volatility.
- Aggressive Investors: Investors who can handle higher risk in exchange for higher potential returns.
- Diversification Seekers: Investors looking to diversify their portfolios with high-growth potential stocks.
How to Select the Best Small-Cap Mutual Funds
The following are some best practices for selecting the best small-cap mutual funds:
- Past Performance: Look at the fund's track record over 5 to 10 years. Consistent performance indicates stability and good management.
- Fund Manager's Experience: Check the experience of the fund manager. Experienced managers are more likely to make informed decisions.
- Expense Ratio: The expense ratio is the annual fee charged by the fund. A lower expense ratio means higher net returns for investors.
- Fund Size: Very Large funds may find it difficult to invest efficiently in small companies. A moderate fund size provides flexibility.
- Consistency: Look for funds that have consistently performed well, rather than those that have had only one good year.
Risks of Small-Cap Mutual Funds
The risk factors associated with small-cap mutual funds are:
- Market Volatility: Small-cap stocks can fluctuate sharply in price.
- Liquidity Risk: Although mutual funds are liquid, the underlying small-cap stocks may not be easy to sell quickly.
- Economic Slowdowns: Small companies are more vulnerable during economic downturns.
Tips for Investing in Small-Cap Mutual Funds
The following points will help you in investing in small-cap funds:
- Invest Long Term: Aim to hold small-cap mutual funds for at least 5 to 10 years to benefit from growth potential.
- Use SIP (Systematic Investment Plan): Regular investments reduce the risk of timing the market and average out the cost of investment.
- Diversify Investments: Don't invest all your money in small-cap funds. Balance your portfolio with proper diversification in large-cap and mid-cap funds as well.
- Review Periodically: Keep track of the fund's performance regularly to ensure it aligns with your financial goals.
- Stay Informed: Follow market trends and news about small-cap companies to understand potential risks and opportunities.
List of Some Best Small-Cap Mutual Funds in India
The following are some of the best small-cap funds in India:
- Axis Small Cap Fund
- SBI Small Cap Fund
- Nippon India Small Cap Fund
- HDFC Small Cap Fund
- ICICI Prudential Small Cap Fund
- Kotak Small Cap Fund
- DSP Small Cap Fund
- L&T Emerging Businesses Fund
How FinAtoZ Can Help
FinAtoZ is a SEBI-registered financial planner in India. We provide personalized, research-backed financial planning and investment advisory services. Here's how FinAtoZ can help you with small-cap mutual fund investments:
- Personalized Financial Planning: We create a customized financial plan based on your goals, risk tolerance, and investment horizon.
- Expert Fund Selection: Our experts analyze market trends and select the best small-cap mutual funds in India for your portfolio.
- Regular Monitoring and Rebalancing: We track your investments and suggest rebalancing when needed to align with your goals and market conditions.
- Clear Goal Tracking: We help you track your financial goals, whether it's wealth creation, retirement planning, or buying a house, with actionable insights.
- Long-Term Support: Our team offers continuous support and guidance to help you stay invested and make informed decisions.
You can also read our customer experiences on how FinAtoZ helped them with financial planning and investments by visiting the customer testimonial section.
Wrapping Up
The best small-cap mutual funds are ideal for investors who seek high growth and can handle risk. These funds provide a chance to invest in small companies with big potential. With the help of professional fund managers, diversification, and long-term investment, small-cap mutual funds can be a valuable part of your portfolio.
If you want to invest wisely, FinAtoZ offers research-backed financial planning and advisory services that help you plan your goals, invest smartly, and track your investments. Visit FinAtoZ to get started today.
To know more, explore FinAtoZ’s expert blog section!
Frequently Asked Questions - FAQs
What are the best small-cap mutual funds in India?
The best small-cap mutual funds in India typically include Axis Small Cap Fund, SBI Small Cap Fund, Nippon India Small Cap Fund, HDFC Small Cap Fund, and ICICI Prudential Small Cap Fund. These funds are chosen based on consistent performance, experienced fund managers, and reasonable expense ratios.
How can I choose the best small-cap mutual funds for my investment?
To choose the best small-cap mutual funds, look for funds with a strong track record over 5 to 10 years, low expense ratios, experienced fund managers, and a balanced portfolio. It is also important to check the fund size and consistency of returns.
Are the best small-cap mutual funds risky?
Yes, the best small-cap mutual funds come with higher risk compared to large-cap or mid-cap funds. Small-cap stocks can be volatile and sensitive to market conditions. However, they offer the potential for higher returns if you invest for the long term.
What is the typical return from the best small-cap mutual funds?
The small-cap mutual fund returns can vary widely based on market conditions and the specific fund. Historically, they have delivered higher long-term returns compared to large-cap funds, sometimes ranging from 12% to 20% annually, but they can also experience sharp short-term fluctuations.
Should I invest in the best small-cap mutual funds through SIP or lump sum?
Investing in the best small-cap mutual funds through a Systematic Investment Plan (SIP) is usually recommended. SIP allows you to invest regularly in smaller amounts, which helps manage market volatility and reduces the risk of timing the market incorrectly.
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