Introduction
In the dynamic landscape of investing, Small Cap Mutual Funds are equity funds that invest primarily in stocks of small companies, typically those ranked below the 250th position in terms of market capitalisation. These funds offer the potential for significant growth and higher returns compared to large-cap and mid-cap funds, but they also carry higher risks due to the volatility of small-cap stocks.
In this article, we will delve into a detailed study of Small Cap Category. It will provide all the necessary details that will help to choose whether you need this in your portfolio or not.
Do not go anywhere as this post will end with giving you a list of the top 5 small cap funds to invest in 2024.
Benefits of Investing in Small Cap Funds
Among the various benefits offered by this category, the potential to take the investor towards growth opportunities is an addition. It gives the following growth opportunities:
Significant Growth Opportunities: Small-cap companies have more room for growth than larger, more established ones. As these small companies grow, their stock prices can rise dramatically, providing investors with the opportunity for substantial capital appreciation.
Market Dynamics: Smaller companies can adapt quickly to market changes and innovate rapidly, often leading to impressive earnings growth.
The most important part of an investment is the distribution of assets known as diversification. Here are some ways this category allocates its assets:
Portfolio Diversification: Adding small-cap funds to your portfolio can help diversify your investments and reduce overall risk. Small-cap stocks often perform differently from large-cap and mid-cap stocks, providing exposure to different sectors and themes.
Uncorrelated Returns: Small-cap stocks may have less correlation with the broader market, which can help cushion your portfolio during periods of market turbulence.
Value Discovery in Small Cap Funds
There are multiple schemes offered by the small-cap category which allows making high returns:
Finding Hidden Gems: Small-cap funds may help you discover undervalued or overlooked stocks with strong fundamentals and growth prospects. These stocks can offer attractive valuations and higher margins of safety compared to large-cap and mid-cap stocks.
Potential for High Returns: Identifying and investing in emerging companies early can lead to significant returns as these companies grow and mature.
Risks and Considerations to Keep in Mind for Small Cap Funds
The following aspects must be considered before investing in a small-cap scheme:
Market Sensitivity: Small-cap stocks are more sensitive to market movements and can experience sharp ups and downs in their performance. They may even underperform the broader market in the short term.
Economic Conditions: Small companies may be more affected by economic downturns, credit conditions, and market sentiment.
Investment Horizon: Small Cap Mutual Funds require a long-term investment horizon of at least 5 to 10 years to benefit from the power of compounding and ride out market volatility.
Patience is Key: Investors need to be patient and not be swayed by short-term market movements.
High-Risk Tolerance: Investing in small-cap funds is suitable for investors with a high-risk tolerance who are willing to take on higher risks in pursuit of potentially higher returns.
Potential for Losses: The volatility of small-cap stocks can lead to significant losses, especially for those not prepared for the inherent risks.
Research and Analysis: Choosing the right small-cap fund requires thorough research and analysis. Investors should look for funds with a consistent track record, a robust investment process, and a competent fund manager.
Management Quality: The expertise of the fund manager plays a crucial role in navigating the complex small-cap space.
Balanced Allocation: Small-cap funds should not comprise a significant portion of your portfolio. It is essential to maintain a balanced asset allocation that suits your risk profile, investment objective, and time horizon.
Diversification Strategy: Include a mix of large-cap, mid-cap, and other asset classes to balance risk and reward.
5 Best Small Cap Funds to Invest in 2024
Nippon India Small Cap Fund
The Nippon India Small Cap Fund aims to achieve long-term capital growth by primarily investing in small-cap companies’ equity and related instruments. The fund emphasizes selecting businesses with growth potential, solid management, and fair valuations. As of March 2024, it had 95.94% of its assets in equities, with major holdings in Tube Investments of India, HDFC Bank, Voltamp Transformers, Apar Industries, and Multi Commodity Exchange of India.
SBI Small Cap Fund
The SBI Small Cap Fund is designed to provide investors with long-term capital growth opportunities and liquidity by maintaining an actively managed portfolio mainly comprised of small-cap companies’ equity and equity-related securities. The fund uses a bottom-up approach to selecting stocks.
Quant Small Cap Fund
The Quant Small Cap Fund targets capital appreciation by investing in small-cap stocks, utilizing a quantitative investment strategy. The objective is to outperform the benchmark by finding undervalued stocks with robust fundamentals.
Canara Robeco Small Cap Fund
The Canara Robeco Small Cap Fund seeks capital appreciation through investments in small-cap stocks. It employs a bottom-up approach to stock selection, focusing on companies with high growth potential and reasonable valuations.
Bandhan Small Cap Fund
The Bandhan Small Cap Fund aims to achieve long-term capital appreciation by predominantly investing in small-cap stocks. The fund follows a multi-cap strategy and seeks undervalued stocks with strong growth prospects. As of March 2024, it had achieved a 69.13% return in the previous year.
These Small Cap Mutual Funds offer substantial growth potential but come with higher risks due to the inherent volatility of small-cap stocks. Investors should carefully assess their risk tolerance and investment horizon before committing to these funds.
Conclusion
Small-cap funds can be a valuable addition to your investment portfolio if you have a long-term investment horizon and a high-risk appetite. However, it is crucial to carefully consider your investment goals, risk tolerance, and asset allocation before investing in small-cap funds. As with any investment, it is always advisable to consult with a financial advisor or mutual fund distributor to make an informed decision.
By incorporating small-cap funds wisely, you can potentially enhance your portfolio’s growth prospects while managing the associated risks effectively.
For a comprehensive approach to managing your SIP and other investments, consider using a user-friendly platform to streamline your investment process and help you make informed decisions. Small-cap mutual funds are equity funds that invest primarily in stocks of small companies, typically those ranked below the 250th position in terms of market capitalisation. These funds offer the potential for significant growth and higher returns compared to large-cap and mid-cap funds, but they also carry higher risks due to the volatility of small-cap stocks.
