Small Cap Funds

Best Small Cap Mutual Funds

Small Cap Mutual Funds invest primarily in the shares of companies with small market capitalisations, typically ranking beyond the top 250 listed companies. These funds have the potential for high growth as they target emerging businesses with immense scalability. However, these mutual funds come with higher risks due to market volatility and the possibility of underperformance in bearish markets. Small Cap Funds are suitable for investors with a long-term horizon and high-risk tolerance.

What are Small Cap Funds?

Small-cap mutual funds are equity funds that invest up to 65% of their corpus in companies with small market capitalisations. These companies typically have a market capitalisation of less than ₹5,000 crores. They are generally in the early stages of development, providing a significant opportunity for growth. However, they are more vulnerable to market fluctuations than large or mid-cap companies.

Features of Small Cap Mutual Funds

1. Small-cap companies have room for expansion, making them suitable for investors seeking aggressive growth.
2. These funds are sensitive to market movements, often experiencing sharp price fluctuations.
3. Small Cap Mutual Funds are suited for long-term investors, as short-term performance can be unpredictable.
4. These mutual funds allow you to invest in multiple sectors and emerging companies, helping to diversify your portfolio.

List of Best Performing Small Cap Mutual Funds

Factors to Consider Before Investing in Small-Cap Mutual Funds

1. Risk Tolerance: Small Cap Funds can deliver high returns, but the risk is equally significant. Ensure you can handle market volatility.
2. Investment Horizon: These funds require a long-term investment strategy, ideally over 7-10 years, to reap the benefits of compounding.
3. Fund Performance: Check the fund's past performance, but remember, past performance doesn’t guarantee future results.
4. Expense Ratio: The fund’s expense ratio can impact returns. It is important to compare the expense ratios of various Small-Cap Mutual Funds before investing.

Advantages of Small Cap Funds

1. High Return Potential: Small-cap companies have higher growth potential than large-cap companies, which can lead to significant returns.
2. Undervalued Stocks: Small-cap Funds often invest in undervalued companies, offering investors opportunities to profit from future price increases.
3. Diversification: These funds provide exposure to various sectors and industries, which helps mitigate the risk of investing in a single sector.
4. Portfolio Growth: Adding Small Cap Mutual Funds diversifies your portfolio and potentially enhances your overall returns.

Who Should Invest in Small Cap Funds?

Small Cap Mutual Funds are ideal for investors who:

1. Have a high-risk appetite and can endure market volatility.
2. Are seeking long-term capital appreciation over 7-10 years.
3. Want to diversify their portfolio beyond large-cap and mid-cap stocks.
4. Understand that returns may be uneven and prefer a long-term approach to investing.

Taxation on Small Cap Mutual Funds

Small Cap Mutual Funds are taxed similarly to other equity funds in India:

1. Short-Term Capital Gains (STCG): Gains from investments held for less than one year are taxed at 20%.
2. Long-Term Capital Gains (LTCG): Gains from investments held for more than one year are taxed at 12.5% if they exceed ₹1 lakh in a financial year.
3. Dividend Distribution Tax (DDT): Though dividends are tax-free in the hands of investors, they are subject to DDT, which affects overall returns.

What are the Steps to Invest in Small Cap Mutual Funds?

Investing in Small Cap Mutual Funds is simple:

1. Direct Investment: Visit the Asset Management Company’s (AMC) website to invest directly without incurring distributor fees.
2. Through a Broker: Use online platforms such as Stack Wealth to invest in these funds.
3. Systematic Investment Plan (SIP): Start a SIP to invest small amounts regularly, minimising the impact of market volatility.

Risks Involved in Small Cap Mutual Funds

1. Market Volatility: Small-cap companies are more affected by market trends, leading to higher volatility in fund performance.
2. Liquidity Risk: Small-cap stocks often have lower trading volumes, making it difficult to sell shares quickly in a declining market.
3. Business Risk: Many Small-cap companies are in their early stages and may face business failure or significant financial challenges.
4. Sector-Specific Risks: Small Cap funds may be heavily invested in specific sectors, which could underperform.

Small Cap Mutual Funds investments can be rewarding if you have the patience and risk tolerance to endure market fluctuations. These funds offer investors the growth potential of emerging businesses, with the possibility of high returns over the long term. However, these funds come with increased volatility and risk, making them suitable for investors with a high-risk appetite and a long-term investment horizon. Before investing, evaluating factors such as market conditions, financial goals, and risk tolerance is essential. While the rewards can be significant, it’s crucial to approach Small Cap Funds with a well-informed strategy and a focus on long-term wealth creation.