Small Cap Mutual Funds: It Is Time to Know The Truth About Investing
Introduction
Investing in Small Cap Mutual Funds can be both thrilling and demanding. These funds primarily target companies with smaller market capitalisations, typically ranging from Rs.1000 to Rs.15000 Crores.
Small-cap funds are known for their potential to deliver substantial returns over the long term. Still, they also carry higher volatility and risk due to the relative instability of smaller companies. This asset class can be appealing to investors seeking significant growth opportunities. It’s important to assess and manage the associated risks carefully.
This comprehensive article thoroughly examines the fundamentals of small-cap mutual funds. Delving into their potential for high growth and volatility, as well as outlining specific tactics.
The approaches for achieving success in investing in this particular asset class. Let us start our analysis by learning more about this small-cap category.
What are Small Cap Mutual Funds?
- Small-cap mutual funds primarily invest in companies with market capitalisations typically ranging from Rs.1000 to Rs.15000 crores.
- These companies are characterized by their smaller size and early-stage growth potential, often operating in niche markets or emerging industries.
- Due to their size and growth stage, these companies may offer higher growth prospects but also come with higher risk.
- The small-cap mutual funds seek to capitalize on the growth potential.
- These companies invest in a diversified portfolio of such small-cap stocks.
- It aims to benefit from its potential rapid expansion and long-term growth.
Advantages of Small Cap Mutual Funds
It is necessary to identify the merits of a scheme before investing in it. Here are some basic advantages offered by this category are as follows:
High Growth Potential
Small-cap companies often have greater growth potential compared to large-cap counterparts. Historically, small-cap stocks have outperformed large-cap stocks over long periods, although they exhibit greater volatility.
Diversification Benefits
By including small-cap funds in a diversified portfolio, you can gain exposure to different sectors and companies not part of the large-cap universe. This diversification helps manage risk and can improve overall portfolio performance.
Market Inefficiencies
Small-cap stocks receive less coverage from analysts and institutional investors, creating opportunities for astute fund managers to identify undervalued companies and generate alpha.
Risks of Small Cap Mutual Funds
Investing in a mutual fund scheme requires a proper assessment of risk related to its investment. The following are some aspects that should be looked over:
Volatility
Small-cap stocks typically exhibit more volatility than large-cap stocks. Their prices can fluctuate significantly due to lower trading volumes and sensitivity to market conditions.
Liquidity Issues
Smaller companies often face liquidity challenges, meaning that buying and selling shares can impact the stock price more than it would for a large-cap stock. This can make it harder to enter or exit positions without affecting the market.
Economic Sensitivity
Small-cap enterprises are typically more vulnerable to economic downturns.
They may have limited access to capital and fewer resources to withstand financial pressures than larger companies.
Strategies for Investing in Small Cap Funds
The following are the strategic approaches followed by Small Cap Mutual Funds:
Long-Term Horizon
Given the volatility and potential for high growth, you should adopt a long-term investment horizon when investing in small-cap mutual funds. This allows you to ride out short-term market fluctuations and benefit from the compounding growth of successful small-cap companies.
Diversification
To mitigate the risks associated with small-cap stocks, diversify your investments across various sectors and industries. Investing in a diversified small-cap mutual fund helps spread risk and reduce the impact of any single underperforming stock.
Research and Selection
Conduct thorough research due to the lack of analyst coverage on many small-cap stocks. Focus on funds managed by experienced professionals with a proven track record of identifying high-potential small-cap companies.
Monitoring Economic Indicators
Keep an eye on economic indicators and market conditions to anticipate periods of increased volatility. Small-cap stocks tend to perform well during economic expansions and may suffer during recessions.
Examples of 5 Top Small Cap Mutual Funds
Some of the top-performing small-cap mutual funds as of 2024 include:
Nippon India Small Cap FundMr Samir Rachh manages the Nippon India Small Cap Mutual Fund, which was established on September 16, 2010. This plan has yielded 22.35% since its commencement. It invests in small-cap firms to generate long-term capital growth. The fund’s aggressive management style and diverse portfolio are designed to target rising firms with significant growth potential and good fundamentals.
Quant Small Cap FundThe Quant Small Cap Mutual Fund was formed on November 24, 1996, and selects small-cap equities using a quantitative investment method. Mr Sandeep Tondan is the managing director who has overseen the company’s growth in the sector. It uses statistical models and algorithms to uncover cheap stocks with growth potential. The fund’s systematic investing strategy seeks long-term wealth appreciation.
Mahindra Manulife Small Cap FundMahindra Manulife Small Cap Mutual Fund intends to invest in small-cap firms with high growth potential. It was started on December 12, 2022, and has since earned 51.53% returns. This is a great performance, outperforming the other funds in this area. It takes a bottom-up strategy for stock selection, concentrating on firms with strong business models and competitive advantages to achieve long-term capital appreciation.
Bandhan Small Cap FundBandhan Small Cap Mutual Fund was launched on February 25, 2020, and invests largely in small-cap firms to promote long-term capital growth. Mr Manish Gunwani has been selected as the scheme’s new fund manager. With years of expertise in the sector, his track record suggests a bright future for investors. It seeks firms with solid foundations, excellent management teams, and the potential for future development in a variety of industries.
SBI Small Cap FundMr Rama Iyer Srinivasan manages the SBI Small Cap Mutual Fund, which invests largely in small-cap firms with the goal of long-term capital appreciation. This scheme was started on September 9, 2009, and has returned 20.87% since its commencement. It employs a research-driven investing strategy, concentrating on firms with great growth prospects and good prices to diversify clients’ portfolios while capitalizing on the growth potential of small-cap companies.
Conclusion
Small-cap mutual funds offer SIP, the opportunity to capitalize on the growth potential of smaller companies. Investing in small-cap mutual funds involves a higher level of volatility and risk.
However, by adopting a long-term investment strategy, diversifying your portfolio, and conducting thorough research, you can effectively manage these risks and potentially reap significant rewards.
Small-cap mutual funds are not for the faint of heart, but for those willing to embrace the risks, they offer significant potential for high returns and can provide a substantial boost to investors’ portfolios.
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