7 Best Small Cap Funds to Invest


7 Best Small Cap Funds to Invest
7 Best Small Cap Funds to Invest
Spread the love

What is Small Cap Fund?

Small Cap Mutual Funds invest their funds in small market capitalization companies. All companies ranked below the 250th position by the Securities and Exchange Board of India (SEBI) are classified as small-cap companies. The order is determined by the market capitalisation of each company. The market capitalisation of small-cap enterprises is less than Rs. 500 crores.

SEBI also mandates that small-cap mutual fund schemes invest at least 80 percent of their total assets in these firms. The mutual fund scheme may invest in either small-cap equity or equity-related products. These investments are extremely volatile and carry a high level of risk. Even minimal market volatility affects the share values of small-cap enterprises. However, when the company grows, these stocks also give investors greater rewards. 

The majority of investors choose small-cap stocks for short-term investments. Small businesses need time to expand, therefore this may not be a good idea. Consequently, you may choose small-cap funds based on your risk tolerance and time horizon. Your risk tolerance should ideally be greater, and your investment horizon should be longer.

Invest in top SBI Small Cap Fund at Kuvera

Benefits of Investing in Small Cap Funds

Investing in Small Cap Mutual Funds affords you the following benefits:

  • Small-cap funds have a strong growth potential since they invest in new firms with greater expansion potential. These businesses are more able to scale their operations than larger businesses.
  • Small-cap companies are underreported since the majority of them are undiscovered. Consequently, they have minimal analyst coverage. There is a significant likelihood that they are undervalued, and as a result, small-cap mutual funds offer an attractive investment opportunity. Such companies are ideal for investors who are okay with much higher levels of risk.
  • Adding small-cap funds to your portfolio allows you to achieve a balanced risk-return profile. Consequently, these funds allow you to diversify your investments, so minimizing your overall risk.
  • Small-cap firms have a larger potential of undergoing mergers and acquisitions. To grow inorganically, they may be acquired or merged with their larger counterparts. As a result, the share price of smaller companies may increase, so boosting the value of small-cap funds.
  • Small-cap firms are thinly traded on the stock market, resulting in little liquidity. Although some investors view this as a disadvantage. It is advantageous for investors who recognize the company’s potential. Once the company’s results and revenue are made public by management, a huge number of investors may rush to purchase its shares. As a result of the tremendous demand for and limited supply of publicly traded shares, the price of these shares increases rapidly.
See also  Ant-Man 3: Director Praises Jonathan Majors' Serious Approach To Kang

Cons of Investing in Small-Cap Funds

You must keep the following limitations in mind when investing in Small-Cap Funds:

  • Small-cap companies are more susceptible to risks. Typically, they cannot withstand a financial crisis or economic depression. Numerous small-cap companies fail while attempting to compete with their rivals. The value of small-cap funds that invest in these companies might also decline significantly. Therefore, they are unsuitable for investors with a low tolerance for risk.
  • Small-cap mutual fund purchases and redemptions are governed by market volatility. The ups and downs of the market can quickly make or ruin a small-cap mutual fund.
  • Small-cap stocks are affected when market sentiment becomes negative. Small-cap stocks have a tendency to bleed during market volatility. During such periods, the volatility of the stock values of small-cap enterprises is elevated.
  • Small-cap companies are typically young and hence do not pay dividends. As they need to expand their business, they typically reinvest their profits. Therefore, you cannot rely on small-cap funds as a source of dividend income.
  • There are hundreds of small-cap funds due to the enormous number of small-cap companies. It is tough to determine which will increase your investment and which will not provide adequate returns. To choose the ideal small-cap fund and find those with the most investment potential, you must undertake an extensive study.

List of Top 7 Small Cap Funds (as per Daily AUM (Cr.))

Scheme3-Year ReturnDaily AUM (Cr.) (INR)
Nippon India Small Cap34.97%22,751.45
SBI Small Cap Fund30.42%14,950.76
HDFC Small Cap Fund27.43%14,223.95
Axis Small Cap Fund28.09%11,093.25
DSP Small Cap Fund30.06%9,041.17
L&T Emerging Businesses Fund28.79%8,399.63
Kotak Small Cap Fund34.078,380.32

Source: AMFI (data as of 10/11/2022)

See also  How Long Do RV Tires Last?

Who Should Invest in Small Cap Funds?

The volatility of small-cap companies is what drives the performance of small-cap mutual funds. They are perfect for investors who are willing to assume greater risk for the possibility of greater reward. You should only consider investing in small-cap mutual funds if you have a high-risk tolerance. Keep in mind that while the market is declining, your rewards may be drastically reduced. You should consider the aggressive expansion of small-cap enterprises’ finances. It makes the share prices of these companies more volatile and susceptible to losses in the event of a market decline.

Diversify your portfolio to avoid losing all of your money at once, as advised by experts. Therefore, you must invest with prudence and include both small and mid-cap funds in your portfolio. It provides protection if your small-cap funds fail. Even the majority of small-cap fund schemes invest between 80 and 90 percent in small-cap companies. The remainder of their investments is in mid-sized firms.

You may discover the top small-cap mutual funds and allocate a percentage of your portfolio to them.

Conclusion

With small-cap mutual funds, you may diversify your portfolio. Prior to investing in these schemes, you must evaluate your long-term financial objective, risk appetite, and investment horizon. However, before investing, you must conduct adequate research on the fund. Consider all variables that make these funds high-risk.


Spread the love

Scoopearth Team
Hi This is the the Admin Profile of Scoopearth. Scoopearth is a well known Digital Media Platform. We share Very Authentic and Meaningful information related to start-ups, technology, Digital Marketing, Business, Finance and Many more. Note : You Can Mail us at [email protected] for any further Queries.