Small Cap Equity Fund: Meaning, Benefit & How to Invest Online (2024)

Small-cap mutual funds are invested in companies that are below the top 250 stocks in the exchange as per their market capitalization. Small-cap mutual funds have turned out to be a popular investment option due to their high returns. Here, we will explore what they are all about how they can help build your investment portfolio, and if they are the right choice for you.

1. What is a Small Cap Mutual Fund?

The capitalization of the company in which you invest is one of the essential variables when deciding what goes into your equity portfolio.

Small Cap Funds invest in all companies except the top 250 in terms of market capitalization. Though these funds are relatively riskier and volatile in the short to medium term than other equity-oriented funds, they promise a higher upside of return in the long term.

The stocks of these companies can possibly twofold or even triple up over an exceptionally brief period. However, like most of the investments in the market, the risks always persist. It is advised that you keep a bit of the best small-cap mutual funds in your investment portfolio to make sure that you are not missing out on the returns that you can get from them.

2. Things Investors Should Consider Before Investing in Small Cap Funds

Small-cap mutual funds are liable to a sufficient bit of risk in the market, and it is recommended that investors look at all the factors that influence the performance of these funds. You have to think about factors such as how much risk you are willing to take, what happens to be your investment goal, etc.

Following are a portion of different factors that you should recollect before deciding to invest in the best small-cap funds:

• Investment risks:It is quite true that even the best small-cap mutual funds pose a significant bit of risk, but then again, some funds can oversee these risks to provide fruitful returns. One should look at the various funds that have performed better than the Small Cap benchmark and other small-cap funds to make sure that they are getting good returns that pose less risk.
• Investment return:Small-cap mutual funds tend to yield high returns and can be a great addition to your portfolio. With a significant bit of risk, you can ensure that these funds act as buffers in your portfolio that provide high value if things work out in the market for them.
• Investment cost:Small-cap equity funds come with an expense so that your investment is well‐managed. This is called the expense ratio of a fund. The guidelines laid out by SEBI limit the expense ratio of a fund to 2.50%. One should look at net return post expense while shortlisting a fund.
• Investment goals:When the market starts falling, even the top small-cap mutual funds can face significant erosion with their returns. Hence, if you need to make the most out of your investment, you should invest for a long-term goal, which might come up in up to 7-10 years, such as the education of your children, saving for your days of retirement, buying a home, and more.
• Taxation:Capital gains earned while redeeming small-cap equity funds are taxed depending on how long the amount was kept invested, and this investment period is called a holding period.
  Capital gains from redemption that are on a holding period of up to one year are known as short-term capital gains (STCG), and they are taxed at 15%. Now, the holding period of more than one year is called long-term capital gains (LTCG), and when they exceed one lakh, they are taxed at 10% on the amount exceeding one lakh.
• Expense Ratio: Some expenses eat into your returns. To manage the mid-cap fund, the asset management company (AMC) charges a fee from you on an annual basis called Expense Ratio, which reduces your real returns. So you should always try and pick a fund that has the least expense ratio coupled with a good track record.

3. Who Should Invest in Small Cap Funds?

People who are ready to take some risks to make the most of their portfolio should think of investing in small-cap mutual funds. These funds are known to offer high returns when the market is bearish. However, when the market sees a downfall, these funds can be significantly affected.

It is recommended that you have a small portion of your investment portfolio dedicated to the best small-cap funds.

4. Top Performing Small Cap Funds

Here, we will look at some of the top-performing small-cap funds based on values of performance indication. These returns are based on the three‐year returns of these funds.

5. What are the Advantages of Investing in Small Cap Mutual Funds?

• High Growth Potential: Small-cap funds invest in small-cap companies that are typically in their early stage of business and have huge growth potential. When you invest in the small-cap funds, you invest in these high-potential growth companies. As these companies grow in future, the value of stock prices also increases, thereby increasing your return.
• Diversification: Including small-cap funds in your portfolio can be a smart move to have a diversification in your portfolio. As the small-cap investment universe is large compared to the large and midcap space. These funds typically invest in different types of companies across different sectors, allowing you to have a diversified portfolio.
• Ignored by Big Institutions: Small-cap stocks are often ignored by big institutional investors, leaving room for organic growth. With less attention from analysts and institutions, small-cap stocks can be undervalued in the market, which allows fund managers to reap the benefit of investing in hidden gems.

6. How to Invest in Small Cap Funds

It is quite easy to invest in Small Cap Funds on ET Money. Here are the steps that you can follow:

• Download the ET Money app or visitetmoney.com/mutual-funds/equity/small-cap/36
• Find the Small Cap Fund you want to invest in
• Click on Invest Now, enter the amount and mode of investment
• Provide basic details like Pan & Bank Details & you are all set

7. Who Should Invest in Small Cap Fund?

Small caps are suitable for certain investors based on their risk profile, individual goals and investment horizon. Here are some of the types of investors who can consider investing in small-cap funds.

• Long-Term Investors: Small-cap investments can be volatile in the short run, making them suitable for investors with a time horizon of seven years or more. Over the long duration, small-cap funds have the potential to generate significant returns.
• Diversification Seeker: If you want to diversify your portfolio, adding small-cap funds to your portfolio is an advantage. It invests in new and emerging businesses that are in their early stage of business and in various sectors. This allocation to various sectors allows the fund to minimise the overall portfolio risk and maximise the return. If you are looking for funds that include exposure to different market segments, you may allocate a small portion of your portfolio to small-cap funds.
• Risk Tolerance: Small-cap stocks are generally more volatile than large-cap stocks. If you are willing to take higher risks and want to take advantage of the market fluctuations, then small-cap funds are suitable for you.
• High Growth Aspirations: Small-cap stocks have the potential for rapid growth as they invest in early-stage companies. So, if you want to earn high growth and accept higher volatility, you can go with small-cap funds.

8. Frequently Asked Questions (FAQs)