These mutual funds focus on investing in companies that fall within the small cap category. Small Cap Funds refers to stocks of companies with relatively small market capitalizations.
Market capitalization is a measure of a company’s total value based on its stock price and the number of shares outstanding. In this case, the small cap category includes all stocks except for the largest 250 stocks by market capitalization.
These funds play an important role in diversifying investment portfolios and offering investors exposure to high growth potential companies.
Benefits of Investing in Small Cap Fund
Investing in small cap category with several benefits that make them attractive to investors:
Higher Returns Over the Long Term
Small cap mutual fund have the potential to generate higher returns compared to other types of investments over an extended period. This is because smaller companies often have more room for growth and can experience significant increases in value as they expand their operations and increase their market share. While there may be more volatility in the short term, patient investors can benefit from the growth trajectory of these companies over time.
Diversification Benefits
Small caps offer diversification benefits by adding a different asset class to an investment portfolio. By complementing large cap holding with small cap investment, investors can spred their risk across a broader range of companies and industries. This diversification helps to reduce the overall risk of the portfolio and can enhance long-term returns by capturing the growth potential of smaller companies that may not be represented in large cap stocks.
Identification of Hidden Gems
Small cap schemes provide investors with the opportunity to identify hidden gems, promising companies that may not yet be widely recognized by the market.
These companies often operate in niche markets or have innovative products or services that have the potential to disrupt industries and generate substantial returns for investors.
By investing in small cap fund, investors gain exposure to these hidden gems and can benefit from their growth as they become more recognized and valued by the market.
Overall, investing in small cap companies can be lucrative strategy for investors seeking higher returns, diversification, and the opportunity to discover hidden gems in the stock market.
However, it’s esstential to consider the risks associsted with small cap investing, including higher volatility and the potential for greater fluctuations in value.
Investors should conduct thorough research and consult with a financial advisor to determine if small cap category match with their investment goals and risk tolerance.
Best Fund of Small Cap Fund
- Quant Small Cap Fund
- HSBC Small Cap Fund
- Canara Robeco Small Cap Fund
- HDFC Small Cap Fund
- Nippon India Small Cap Fund
Case Studies: Successful Small Cap Fund Stories
Several small cap schemes have demonstrated their ability to deliver exceptional returns over the years. For example, Quant Small Cap Fund was launched for investors on January 1st, 2013. As of March 31st, 2024, the fund’s assets under management amount to ₹17,349 crores. The main goal of this scheme is to make money by investing in smaller companies that have the potential to grow over the long term. However, it’s important to know that there’s no guarantee that the fund will meet its objectives. The fund aims to provide steady returns over time and can help investors earn high profits.
The Risk of Small Cap Fund
Investing in small cap category can be a smart move for some investors, but it’s important to understand the risks involved.
First off, small cap schemes focus on companies that aren’t the biggest players in the stock market. These companies are smaller in size, so they often have more room to grow compared to the big guys. This growth potential is what attracts investors to small cap fund because they hope to see their assets increase in value over time.
However, with the promise of higher returns comes increased risk. One major risk is market volatility. Small cap stocks can be like roller coasters, with their prices going up and down dramatically
This volatility can make small-cap funds more unpredictable and potentially lead to big swings in your investment’s value.
Another risk is liquidity. This means how easy it is to buy or sell a stock without affecting its price too much.
Small cap stocks tend to have lower trading volumes, which can make it harder to buy or sell shares when you want to.
This lack of liquidity can be a problem, especially during turbulent times in the market when everyone is trying to buy or sell at once.
Then there is concentration risk. Since small cap schemes invest in smaller companies, they often hold fewer stocks compared to larger funds.
While this can lead to bigger gains if the chosen companies do well, it also means that if one or two stocks tank, it can drag down the whole funds’ performance.
In conclusion, small cap MF can be an appealing option for investors looking for high returns and willing to tolerate some risk. By understanding these risks and diversifying your investments, you can make informed decisions and potentially reap the rewards of investing in small cap schemes
Conclusion
Small cap schemes offer investors the opportunity to tap into the growth potential of smaller companies, which can lead to higher returns over the long term. By diversifying their portfolios with small cap investments, investors can spread their risk across a broader range of companies and industries. Additionally, small cap schemes provide the chance to uncover hidden gems—promising companies that may not yet be widely recognized by the market.
However, it’s essential to be aware of the risks associated with small cap investing. Market volatility, liquidity challenges, and concentration risk can all impact the performance of small cap schemes. Despite these risks, with proper research and a long-term investment horizon, small cap stocks can be a valuable addition to an investor’s portfolio.
One way investors can mitigate the risks of small cap investing is by using a SIP. SIPs allow investors to invest a fixed amount regularly, regardless of market conditions. By investing consistently over time, investors can benefit from the power of compounding and reduce the impact of market volatility on their investments.
