Can Small Cap Funds Provide Higher Returns?

Small-cap funds are thought to be high-risk funds. However, you can invest in these funds if you believe they will eventually reward you for taking on significant risks. Small-cap funds invest in startups with enormous growth potential and break into previously unexplored markets.

What are Small-Cap Funds?

Small-cap funds mostly make investments in small-cap businesses. These funds are required to allocate a minimum of 65% of their assets to small-cap firms, which often have strong development potential due to their youthfulness and plans for rapid expansion. Conversely, these funds have a higher volatility than their mid- and large-cap counterparts since they have the potential to provide extremely negative returns during periods of market turbulence. Small-cap enterprises carry a greater risk of financial loss for investors.

Advantages Offered by Small-Cap Funds

The blue-chip companies with enormous market capitalisations under big-cap funds cannot match the significant upside growth potential of small-cap funds.
Since small-cap funds often pay off for long-term investors, exposure to them can increase portfolio returns.
During a bull run, they typically beat large-cap and mid-cap funds, providing you with a great chance to increase your money rapidly and receive higher returns.

Disadvantages Offered by Small-Cap Funds

Because small-cap firms have highly erratic behaviour, the portfolio is volatile and unstable and can experience significant market ups and downs in the near term.
Small-cap funds carry more risk even though they have more growth potential. Thus, they are only appropriate if you are an experienced investor or have a higher risk tolerance.
Due to the limited liquidity of these stocks, low volumes at the time of buy and sale may have an impact on the share price, which in turn may have an impact on the returns on the portfolio.

Who Can Invest in Small-Cap Funds?

A small-cap fund's main goal is to provide long-term capital growth through a diverse portfolio. The return-risk ratio of these ETFs is high. Small-cap stocks that make up their underlying securities are more erratic than their large-cap and mid-cap counterparts. It implies that your portfolio may see significant ups and downs following your investment in a small-cap fund. You choose these funds if you believe you have a high level of risk tolerance and wish to increase your long-term wealth by taking more chances.

These funds claim to deliver higher returns over the long run and have the best growth potential. They also perform well over time. You should search for a fund in a different category if you have a short investment horizon or cannot accept poor returns on your assets at particular times. If you are willing to take on more risk and have a lengthy investment horizon, go for small-cap mutual funds.

Conclusion

Small-cap funds provide chances for diversification and the possibility of larger profits by investing in small-cap firms. You can find some good ones on platforms such as the Axis MF app. They can offer resilience during economic cycles and are available to investors of all sizes. Smaller firms often have fewer financial resources, lower overall company strength, and more volatile stock prices, which makes small-cap funds riskier than large-cap funds. Investors should think about their goals, time horizon, investment style, and risk tolerance before making an investment in small-cap funds.