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All you should know about small cap mutual funds


If you want to understand mutual funds, you must understand market capitalization. Market capitalization is the value of a company that is traded on a stock exchange. To find the market capitalization, you multiply the current share price by the total number of shares. Mutual funds are divided into three categories based on market capitalization large-cap, mid-cap, and small-cap.


What are small cap mutual funds?


Small-cap mutual funds invest most of their corpus in the equity of small-cap companies. SEBI defines small-cap companies as those ranked below 250 in terms of market capitalization. These companies have a market capitalization of fewer than 500 crores. Small cap funds carries high risk, and their share prices fluctuate even with the slight volatility. However, these stocks can also offer tremendous returns as a small company has the potential to grow. However, investing in small cap schemes for a short duration can be counterproductive as companies need time to grow. Thus, Small cap fund is the best for investors having high-risk tolerance and a long-term investment plan.


Investing in small-cap funds


Experts suggest that an investor should only put a small portion of his portfolio into small-cap companies as they have great potential to deliver high returns, but it is important to be patient while investing in small-cap schemes. Here are a few things to consider before investing in Small-cap funds:

  1. Risk and returns – The NAV of Small-cap funds is sensitive to its underlying benchmark, so when the market is not in good condition, these stocks bear losses. However, that's the time for the investors to take the risk.In the last few years, we have seen a huge growth in small-cap funds. Some Small-cap funds have given more than 100% return in a day.

  2. Low-expense ratio – Before investing in any fund, you should understand the term expense ratio. Each fund house charges something to manage your funds. It charges a fee called the expense ratio, which is a percentage of total assets. SEBI has capped the upper limit of the expense ratio to 2.5%. It is important to choose a scheme with a low expense ratio.

  3. Better for the long term – Small cap funds are better for the long term as it gives them proper time to generate returns. Small-cap funds are highly sensitive to market conditions, so give your investment a little time to produce returns.

  4. Not for investors with a low-risk appetite – Small-cap funds are highly risky, and you should have a high-risk tolerance to invest in small-cap funds. You should invest a small portion of your portfolio in small caps to get good returns without exposing your portfolio to huge risks.

Before investing in mutual funds, you should consider the amount of risk you can handle along with your financial objectives.

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