Small Cap Mutual Funds

Mutual funds are perhaps the best investment tools to help you grow your wealth which you will need if you want to go for that dream vacation, buy a new car or a house, fund your child’s education, etc. They are becoming the most preferred investment tool due to their ability to deliver attractive returns as compared to other forms of investment such as bank deposits, real estate, and gold.

If you have decided to invest in mutual funds, chances are that you may have done a bit of homework by researching on the various kinds of mutual funds. In doing so, you may have stumbled across the words small cap, mid cap, and large cap mutual funds. Let us understand what these funds are but understand about small cap funds a bit more in detail.

What are small cap mutual funds?

Mutual funds that invest in equity and its related securities of companies with smaller market capitalisation are termed as small cap mutual funds. The word ‘cap’ is the short form of ‘capitalisation’. The companies where these funds invest in are ranked 250 and below in the market. The market capitalisation of these firms are below Rs.500 crore.

Small cap firms have a high growth potential due to their aggressiveness to expand but at the same time, they are also vulnerable and volatile. Since the underlying securities in small cap funds are the small cap firms, they have a higher volatility and are riskier than the mid cap and large funds. Hence, is ideal for investors who have a high risk appetite and prefer investing in small cap stocks.

What are large cap and mid cap mutual funds?

Mutual fund schemes that invest in stocks of firms whose ranks in terms of market capitalisation range between 1 and 100 are known as large cap mutual funds. These funds are the least volatile and are known to deliver steady returns. Mid cap mutual funds, on the other hand, are mutual fund schemes that invest in stocks of firms whose ranks falls between 101 and 250.

Who should invest in small cap mutual funds?

Small cap mutual funds are ideal for investors who:

  • Have a high risk-taking capacity.
  • Prefer to invest in small cap companies due to their high growth potential.
  • Wish to invest for a long term horizon, say, at least, for 7 to 10 years.
  • Desire attractive returns on their investment.

Benefits of investing in small cap mutual funds

Over a long term investment horizon, small cap mutual funds have been known to deliver high returns since their underlying small cap stocks have a high growth potential. The fund manager of the small cap funds allocates around 65% to 90% of the investments in such stocks to generate capital gains.

Things to keep in mind before investing in small cap mutual funds

  • Risk - Small cap funds suffer a lot when the market is not performing and hence, it is recommended that you invest in them only if your tolerance towards risk is high.
  • Cost - Since fund houses will charge you a fee known as an ‘expense ratio’ to manage your funds, you should shortlist a fund that has a lower expense ratio. A lower expense ratio translates to better returns over a long investment horizon.
  • Returns - As stated earlier, small cap mutual funds have the ability to fetch really desirable returns when invested over an investment horizon ranging between 7 years and 10 years.
  • Investment horizon - For a small cap fund to yield optimal returns, you should invest in it for at least 7 to 10 years. This is because small cap funds tend to be more vulnerable to market fluctuations which can be balanced out only when the money remains invested for a longer duration.
  • Financial goals - Small cap mutual funds are appropriate for you if you have long-term goals to meet such as saving up for retirement, children's education, taking an exotic vacation, etc., due to their ability to generate optimal capital gains.

Best performing Small Cap Funds

As on 26 November 2018, below are the top 10 small cap mutual funds:

Name of the Scheme NAV 1-Year Return (%) 3-Years Return (%)
HDFC Small Cap Fund - Direct - Growth 44.5470 -1.02 17.99
L&T Emerging Businesses - Direct - Growth 25.1340 -9.91 17.92
L&T Emerging Businesses Fund - Growth 24.3010 -10.68 17.01
HDFC Small Cap Fund - Regular - Growth 41.8270 -2.48 16.46
Reliance Small Cap Fund - Direct - Growth 41.7170 -8.57 14.91
Reliance Small Cap Fund - Growth 39.4257 -9.67 13.59
Aditya Birla Sun Life Small Cap - Direct - Growth 35.2752 -20.24 11.38
Franklin India Smaller Companies - Direct - Growth 54.9930 -13.15 10.76
Aditya Birla Sun Life Small Cap - Growth 33.3714 -21.21 10.21
Kotak Small Cap - Direct - Growth 72.6310 -13.35 10.08

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