In the stock market vertical, small cap mutual funds are considered an enticing option for attaining the benefit of portfolio diversification. They are funds that concentrate on companies beyond the top 250 in terms of market capitalisation. The pathway of such funds is marked by volatility and risk over the short to mid-term as compared to their large and mid-cap equity mutual fund counterparts. So, the small cap funds’ appeal lies in their potential for considerable growth over the long run.

They invest in companies, which often are at the nascent phase of their lifecycle and possess the potential to double or triple their value. But it is crucial to note that high potential returns invite market risks too. A small portion of your investment must only be invested in small cap-funds so that you do not miss out on a lucrative opportunity while maintaining a balanced approach towards investment.

Here, discussed are the intricacies attached to mutual fund investment in small cap, guiding you through their performance, factors to consider before investing, and determining if they align with your investment trajectory.

Factors to consider before investing in small-cap funds

Before arriving at the final decision to invest in small funds, it’s important to understand the performance analysis of these funds. Small funds have distinct risk profiles and being aware of them is the key to effective alignment of your investment with your financial goals and risk tolerance level. Check out some consideration points.

  • Investment returns and risk

While small cap funds may be a means for generating high returns, they come with various risks. So, it is recommended to review funds that have historically outperformed the small cap benchmark and endowed resilience during market fluctuations.

  • Investment costs

Ensure to be mindful of the expense ratio, a fee incurred by the AMCs or Asset Management Companies for managing the funds. It is wise to factor in the funds having a lower expense ratio yet solid track record.

  • Financial goals

Small cap funds can witness considerable value erosion during market downturns. Ensuring to align your investment with long-term financial goals, spanning 5-10 years, can considerably optimise your returns.

How do small cap funds perform?

When it is about small cap funds’ performance, then note that they are synonymous with volatility but even have the potential for generating considerable returns during the bull phase. However, they are not immune to market downturns and can witness considerable dips during bearish phases.

Who should choose to invest in them?

Those investors with an inclination for high risk and a strategic approach to diversification of their portfolio may find small funds an appealing choice. Allocating a measured portion of your investment portfolio to these funds can endow the dual advantages of diversification and high return potential. Moreover, utilising an online SIP calculator can aid in planning and understanding the growth trajectory of your investments in small funds.

Final thought

Small cap funds are a distinctive facet of the mutual fund investment and provide a blend of reward and risk. By meticulously reviewing such funds against your goals, market understanding and risk-appetite level, you can judiciously integrate them into your investment portfolio and make the way for considerable growth and financial fruition.