Small-Cap Funds: How To Choose The Best Small Cap Funds

Top-quality small-cap stocks have traditionally outperformed large and mid-cap stocks in a bullish market. However, if you’re looking to invest via MF schemes, small-cap funds can seal the deal.

Talking about equity mutual funds, you must know the companies’ market capitalisation. Meaning? Market capitalisation is the company’s value, which is traded in the stock exchange. Depending on market capitalisation, MF schemes are categorised as small-cap, mid-cap, and large-cap.

Let’s understand small-cap funds in detail and the things you need to know before investing in them.

What are small-cap MF schemes?

Small-cap funds park a majority of your investible funds into equity securities or equity-related instruments of small-cap companies. As per the SEBI or Securities and Exchange Board of India, small-cap MF schemes must invest a minimum of 65% of their total assets in small-cap organisations.

Besides, SEBI denotes small-cap companies as those that are ranked below 250th in market capitalisation. In other terms, these companies have a market capitalisation of less than Rs. 5,000 crores.

It is crucial to understand that even the best small-cap funds carry a high level of risk. The slimmest possibility of market volatility can hugely impact the share prices of small-cap organisations.

 However, these MF schemes also hold the potential to offer solid returns. Putting things into perspective- imagine a small company that has a high scope for growth. Now, when it grows, its share price would rise drastically as well.

Here, investors ideally shouldn’t invest in small-cap schemes for short-term financial needs. Why? That’s because small companies need time to grow. Hence, it’s prudent to choose small-cap investment schemes if you have an extended investment horizon and a high-risk tolerance.

Additional Read – Is it Advisable to Continue Investing in Small Cap Funds At This Point In 2021?

How to choose the best small-cap mutual funds?

Here are the things you must consider while choosing small-cap MF schemes.

• Risk

Small-cap funds offer more market volatility when compared to large and mid-cap fund schemes. On occasions when the market isn’t performing well, small-cap fund schemes can suffer as they are less established. Contrarily, it’s an excellent investment avenue for those looking for more aggressive growth and those that are comfortable with high risk.

• Returns

Since 2020, the small-cap MF scheme category has recorded exceptional growth and brought investors good returns. With Tata Capital’s Moneyfy app SIP calculator, you can estimate your expected returns in advance before investing in a scheme.

• Investment Horizon

The small-cap funds record return erosion when the market goes bearish. Hence, to allow the fund to generate returns, investors must park their money for the long term. Ideally, you should go for a time horizon of 5-10 years.

Additional Read –Important Tips to Pick Top-Trending Mutual Funds

Over to you

We hope this article helps you make an educated decision about investing in a small-cap fund. When looking to invest in the top-performing small-cap mutual funds, download Tata Capital Moneyfy. Indulge in goal-based investing. Map your financial needs with your investment decisions today!