You can divide funds into large-cap, mid-size, and small-cap categories based on the market cap. Small-cap funds are those with a market capitalization of less than Rs. 5,000 crores, but SEBI has modified this classification based on the following rankings:
>> The top 100 stocks by market cap include large-cap funds.
>> The following 101 to 250 ranked stocks by market capitalization make up mid-cap funds.
>> Stocks and funds with a ranking of 251 or lower are considered small-cap.
What is Small-Cap Fund?
An investment in the stock of companies with a market capitalization of less than Rs 5,000 crore is known as a small-cap equity fund. These businesses are new and growing quickly, making them technically unstable and vulnerable to losses in the event of market unrest.
How Does It Work?
The fund administrators of small-cap mutual funds place at least 65% of their portfolios in small-cap stocks. Small-cap stocks are typically favored by investors who don’t mind taking risks and favor growth over stability. Therefore, small-cap funds’ fund composition is crucial, and making snap choices could put your investment at risk.
One of the important factors in choosing what to include in the stock portfolio is the investing company’s capitalization. All businesses anticipated to rank among the top 250 in terms of market value are covered by small-cap funds. These funds offer better long-term returns but are more volatile and risky than equity-focused funds in the short to medium term. These businesses’ shares can quickly double or triple in value. However, the risk always exists, just like with most market investments.
Who Should Invest in Small-Cap Mutual Funds?
Small investment trusts are a good option for investors ready to take risks to maximize their returns. Even when the market is down, these funds still provide good returns. But if the market declines, these could be severely hurt. A compact framework is necessary for a portfolio of small-cap mutual funds. It is essential to have a benchmark to evaluate results when investors build their equity portfolios. Investors can correctly assess the performance of their portfolios by comparing their results to benchmarks.
Benefits of Investing in a Small-Cap Fund
1. High growth potential:
Investments are made in start-ups or developing industries with growth and diversification space. Small-cap funds have a high possibility for growth as a result.
2. Undervalued assets:
Due to their rarity, small companies are undervalued. Due to this, small-cap mutual funds are a wise investment decision and a great option for risk-tolerant investors.
3. Diversification effect:
Small-cap mutual funds serve to balance the risk-reward trade-off across the board of the entire portfolio. Through these funds, you can lower the danger and diversify your investment.
4. Possibility of M&A (Mergers and Acquisitions):
The likelihood of M&A for small businesses is significant. This is because you can acquire or combine them with a bigger counterpart to expand them. Therefore, the value of small-cap mutual funds may rise along with the stock prices of small companies.
Rarely do small companies trade on the stock market. Investors will benefit from this. When management releases a company’s earnings, many investors may chase after the shares, driving up prices quickly.
A fund carefully chosen by internal experts is simple to invest in. After determining your long-term financial requirements, you can increase your portfolio by investing in small-cap funds. You invest only when you have sufficient knowledge of the financial markets or after consulting with specialists about your risks and returns.