The mutual fund industry is growing manifold, according to a recent report released by the Association of Mutual Funds in India. The report states that the Average Assets Under Management (AAUM) of the Indian mutual fund Industry was Rs.2632824 crore for October 2019.
As an investor, you can invest in mutual funds under three broad categories, namely equity funds, debt funds and hybrid funds. Each of these funds has sub-categories to cater to investors’ varying needs. Once such equity-related fund is small-cap funds.
Let us learn about small-cap funds in detail.
What are small-cap funds?
Mutual fund schemes that invest in small companies having a market capitalisation between Rs.10 crore and Rs.500 crore are termed as small-cap mutual funds As per recent Securities and Exchange Board of India (SEBI) guidelines, small-cap mutual funds must invest at least 65 per cent of their corpus in small companies. These companies are ranked below 250 in the stock exchange in terms of market capitalisation.
Small-cap companies are relatively newer and carry higher risk in comparison to large-cap or mid-cap companies. Therefore, small-cap mutual funds are sensitive to market movements and are likely to generate higher returns in a bull market.
How to choose small-cap funds?
- Past performance
When you decide to invest in mutual funds online, research about its historical performance across bullish and bearish market cycles. For example, if a particular fund has outperformed in a period of 3 to 5 years, it can be considered a good fund.
- Peer performance
Comparing a fund with a similar category of peer funds can help you understand how well it is performing in the market. If a fund has been consistently generating good returns, you can consider investing in it.
- Fund manager’s experience
Mutual funds benefits largely depend on the experience and expertise of the fund manager. Hence, assess the performance fund manager’s record, especially during the best and worst period. It is good to have someone manage your portfolio who knows the techniques of managing risks during highs and lows.
- Portfolio balance
To reap the maximum benefits of mutual funds, pick those small-cap funds that balance your portfolio. You can look for funds that invest in small-cap companies across various industry sectors. This can help you build a diversified portfolio. Besides, mutual funds having stocks with higher trading frequency are likely to offer better returns.
Conclusion
Small-cap mutual fund investments offer superior returns in the long run. Investors have received 12.15 per cent returns from these funds in the past ten years. Since small-cap mutual funds bet on small companies with tremendous growth potential, you could benefit, provided you stay invested for the long-term, i.e. at least seven to ten years. These are ideal for aggressive equity investors who can bear the risk and have a longer investment horizon.
