Have you ever blown up a balloon? Initially, it inflates rapidly but gradually the growth rate declines as it becomes significantly large. However, if there is a hole in the balloon it fails to grow. A similar principle applies to small-cap companies.
Small-cap mutual funds invest in small-cap companies (companies with a market cap of under ₹ 5000 crores). These funds are gaining popularity in the investment world. This article aims to provide you with valuable insights about small-cap funds.
what is a small-cap fund?
Companies or businesses can be categorised based on their market capitalization. Look at the list below.
|Large Cap Companies||More than 20000 Cr|
|Mid Cap Companies||Between 5000-20000 Cr|
|Small Cap Companies||Less than 5000 Cr|
Mutual funds that predominantly (at least 65%) invest in equity and equity-related instruments of small-cap companies are called small-cap mutual funds.
Small-cap mutual funds are considered high-risk & high-return investments. This is because of the potential for rapid growth as well as a higher level of volatility compared to large-cap or mid-cap funds.
Which small-cap fund is best?
The answer to this question may differ for different individuals as each investor is unique.
Based on past 5-year performances, here are some of the best-performing small-cap mutual funds in India.
|Name of fund||3-Year CAGR||5-Year CAGR|
|Axis Small Cap Fund||38.08%||24.60%|
|Nippon India Small Cap Fund||47.81%||24.44%|
|Kotak Small Cap Fund||42.91%||22.82%|
|ICICI Prudential Small Cap Fund||43.45%||22.77%|
|SBI Small Cap Fund||37.09%||21.87%|
|HDFC Small Cap Fund||44.87%||19.50%|
Sidenote! Past performance must not be the only deciding factor. Investors should investigate other factors to choose the best mutual fund scheme that aligns with their goals.
how much to invest in a small-cap fund
Determining the ideal amount to invest in small-cap funds is challenging as it depends on various crucial factors, including:
- Your financial goals
- Risk tolerance level
- Investment time horizon
- Your age
- The way you budget your finances
- Your investing & diversification strategy
While evaluating these factors, personalized advice from a professional financial advisor can be beneficial.
Well, here below are some general tips that may help you a bit. Please note these are not financial advice.
- These funds are not suitable for risk-averse investors so they should invest only a small percentage of their portfolio in small-cap funds
- Small-cap mutual funds may show higher volatility in the short term which may impact short-term returns. Hence, these are not ideal for short-term investments.
- Younger investors may have a longer time horizon and higher risk tolerance that could impact the allocation percentage to small-cap funds
- Investors seeking further diversification and have a long-term vision may find small-cap funds appealing
how to invest in a small-cap fund
There are two ways to invest in any mutual fund- offline & online. Nowadays, most investors go with the online route as it offers more convenience. Here is how you can invest in small mutual funds online.
- Choose an online investment platform
- Open an investing or Demat account
- Complete your KYC
- Choose a small-cap mutual fund to invest
- Decide the mode of investment SIP or lump sum
- Make the payment
- You are done
- Review your investments periodically
Related Read: How to start SIP investment
Alternative Ways to Invest In Small Cap Companies
Let’s discuss some alternative ways to invest in small-cap companies other than small-cap mutual funds.
1. Small-cap Index Funds
A lot of asset management companies have launched their small-cap index funds. They are more cost-efficient than actively managed mutual funds due to their low expense ratios. Read here for a detailed guide on index funds.
2. Small-Cap ETFs
Small-cap ETFs (Exchange Traded Funds) are another good way to leverage the potential of small-cap companies. They are investment funds that hold a portfolio of assets.
3. Direct Investments
If you have a Demat account, you can directly invest in the stocks of small-cap companies. However, it requires good expertise & understanding of the market to generate significant returns.
What Are Some Examples Of Small-Cap Funds?
Here are some examples of small-cap funds:
1. Axis small-cap fund
2. Kotak small-cap fund
3. Nippon India small-cap fund
4. SBI small-cap fund
5. HDFC small-cap fund
Is Small Cap SIP Good?
SIP or Systematic Investment Plan is a popular way to start investing in small-cap mutual funds but investors should consider its own set of advantages and risks.
How Risky Is Small Cap Fund?
Generally, small-cap mutual funds are considered highly risky compared to large-cap & mid-cap funds as they may show high volatility.
How Long Should I Invest In Small Cap Funds?
It completely depends on specific investors’ needs. As a general rule, they are good for a long-term investment horizon (more than 5 years).