What are Small Cap Mutual Funds?

Irrespective of whether you’re an experienced investor looking to diversify your portfolio or a amateur just kickstarting their investment journey, mutual funds are bound to catch your attention. 

After all, these investment vehicles help you benefit from rupee cost averaging, offer significant tax benefits, and empower you to safeguard your portfolio against market fluctuations by allowing you to diversify your investments.

When choosing which one to invest in, one of the preliminary factors to consider is market capitalisation. You see, there are three types of mutual funds based on market capitalisation: small cap, mid cap, large cap. Meaning of these three differ substantially.

Here, we discuss what are small cap funds and how they work.

What Is a Small Cap Mutual Fund?

Small-cap mutual funds invest in companies with a market capitalisation of Rs 5,000 crores and less. These companies are usually young and expanding. Because of this, they can be unstable and have a higher chance of losing money in market turmoil, making them unsuitable to investors with a low-risk appetite. 

How Does a Small Cap Mutual Fund Work?

Now that you know the mutual fund small cap definition, let’s understand how these work. Fund managers typically invest a minimum of 65% of their portfolios in small cap companies. These mutual funds are riskier than other equity-focused mutual funds but do promise higher returns in the long run.

In fact, the share price of small cap companies can double or even triple in a short period, given their potential to grow.

Factors to Consider Before Investing in Small-Cap Mutual Funds

Having discussed small cap mutual funds’ meaning and defined small cap fund, let’s understand some of the critical factors that you must consider when investing in small cap mutual funds:

• Investment Goals

Your unique investment goals must be the guiding light when you consider investment opportunities. For this, you need to compare investments based on their risk, cost, potential for returns and the like.

• Investment Risk

The top-performing small cap funds are those that pose a degree of risk but generate high returns as well. You can consider funds that fair well against small cap benchmarks and other small cap funds to find a top performer.

• Returns on Investment

Small cap funds usually generate significant returns and can make a good addition to your portfolio. While they do have a higher risk, they can help diversify a low-risk portfolio and earn you high returns when the market performs well.

• Taxation

The capital gains earned by selling small cap funds is taxable on the period during which it was held by the investor. Short term capital gains tax is levied on investments held for up to a year. Long-term capital gains tax is applied on investments held for a year or more. 

To Sum Up

Now that you know the meaning of small cap fund, and what is a small cap mutual fund exactly, all you have left to do is choose a reliable financial partner for your mutual fund investments.

For this, consider Tata Capital Moneyfy. Invest in stocks and mutual funds, apply for loans and credit cards, or open a fixed deposit—you can do it all with Tata Capital Moneyfy.

To know more, visit the Tata Capital Moneyfy website or download the Tata Capital Moneyfy App today!