What is a small cap mutual fund? |Definitions, examples, etc.

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Small-cap mutual funds mean funds that invest in companies that have a market capitalization of lesser than ₹500 crores (for Indian Market) & $300 million to $2 billion (for the USA market)

In this article, we will discuss in brief small caps mutual funds.

What is a small cap mutual fund?

What is a small cap mutual fund?

Investors who have the stomach to bear the pain of market volatile should invest in these funds. So if you are a risk-averse investor you can avoid small caps funds totally.

These companies have a great amount of risk as they are less diversified, poor financial backing, less tolerance to bad financial environments, etc. But chances of achieving market outperforming return is high.

Small-cap stocks example:- GMM Pfaudler Ltd. was a small-cap company a few years ago, which delivered a market outperforming return.

How does a small-cap mutual fund work?

Small-cap funds buy stocks that have a market cap of less than ₹500 cr or stocks that rank after 250th in terms of market capitalizations. Most of the small-cap mutual funds charge a higher expense ratio (comparatively) so keeping a watch on it is also important (SEBI guidelines say expense ratio should be more than 2.50%)

These companies are bought with a  dream or thesis that it will be future multi-baggers. Multi-baggers simply means a company will give at least 100% return.

This theory stands true as these companies have more room to grow in the future, but also these companies may attract competition from larger players.

Also, the p/e multiples of these companies are lower because they are less known, which gives the opportunity to fund managers through their research to identify these hidden gems and deliver an outperforming return. 

Who Should Invest in Small Cap Funds?

Small-cap mutual funds are high risk, high reward funds.

Small caps fund investment can be a good long-term investment.

Small-cap mutual funds are great for investors who have an investment horizon of at least 10 years. Because they have a greater room to grow & at the same time in the long term the Mr. market’s madness would dry up.

Investors can also invest in these funds for diversification purposes. So having a 10-20% of the total mutual portfolio to small-cap funds can give you’re portfolio a balance. Also, it balances risk as well as the return of the overall portfolio. 

Companies in these funds suffer more pain during a down market as compared to large caps or even mid-caps.

But there are some companies in this basket that have a monopoly or oligopoly in their respective sectors or industries. You can learn more about them from the book called Hidden Champions of the Twenty-First Century: The Success Strategies of Unknown World Market Leaders (For USA). These stocks can act as defensive stocks against market volatility.

Also Read –Taxation on Equity Mutual Funds.

Lists of Small Caps funds, indexes, index funds

Disclaimer:- The below scheme names are just examples, not recommendations.

Top 5 small cap mutual funds

Fund name Annual return
SBI Small Cap Fund 18.42%
Axis Small Cap Fund 16.51%
Kotak Small Cap Fund 16.04%
Nippon India Small Cap 15.08%
HDFC Small Cap Fund 13.39%

Small-cap Indexes

  • BSE SMALLCAP Index 
  • NIFTY Smallcap 100

Small-cap index funds

  • Motilal Oswal Nifty Smallcap 250 Index Fund 
  • Nippon India Nifty Smallcap 250 Index Fund

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Disclaimer

I am not a SEBI registered investment advisor. This article is for information purposes any scheme or company name mentioned here is just for example & not a recommendation. 

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes. 

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