Posted on 5/25/2023 6:30:00 PM

Equities are a good choice for investors focused on aggressive capital growth. This is because equities have incredible growth potential. The growth of major stock market indices in a longer time frame underlines this fact, delivering healthy growth year on year. The small-cap index, made up of stocks of small-cap companies, deserves special attention as it can deliver better returns than most market indices.

Small-cap mutual funds meaning
The companies listed in India are categorised according to market capitalisation. It helps in identifying and investing in companies with varied characteristics.

For instance, large-cap companies are the top 100 companies in India based on market cap. These are bigger corporations that can provide stable fundamental performance and are considered to be more reliable than smaller companies in market returns.

Meanwhile, small-cap companies have a market capitalisation of less than INR 5,000 crore. These companies may be small but have a lot of room to grow. They exist in every sector and can provide good long-term growth to investors. It's essential to remember, though, that small-cap companies tend to be more volatile than large-cap companies, and the value of your investment in a small-cap company may charge more based on how the market is doing.

Investing in small-cap companies is a good way if you are aiming to get higher returns, but you must be aware of the risks. Mutual funds that invest in small-cap companies are known as small-cap mutual fund schemes. Because of their portfolio choices, they exhibit similar characteristics to that of small-cap companies.

Why invest in small-cap funds?
There are several advantages of investing in small-cap funds. We've discussed some of them below:

  Small-cap companies may have more room for growth than large-cap companies, which may lead to higher returns for investors. Small-cap companies are getting started on their path to becoming larger, more successful businesses and are in the beginning stages of growth and development.

  Small-cap funds may offer investors exposure to a diverse range of small-cap companies, which can help reduce the risk that small-cap companies carry. The fund's diversification approach provides this exposure.

  Small-cap schemes, like a lot of other mutual fund schemes are managed by professional fund managers, who draw on their extensive industry experience to select the small-cap companies that they believe have the growth potential. These fund managers research and analyse potential investments and decide which securities the fund should buy and sell based on the scheme’s investment objective.

  Although small-cap companies might carry more risk than large-cap companies, the former has the potential to experience significant expansion. Investors who invest into small-cap mutual fund schemes stand a good chance of profiting from the expansion of smaller companies as those businesses mature and achieve greater levels of success.

But they carry certain risk factors as well. Some of these are listed below.

Things to keep in mind while investing in small-cap mutual fund schemes

  The inherent unpredictability of small-cap companies, which can cause significant market swings up and down in the short term, could make a portfolio volatile.

  Although there is a greater potential for growth with small-cap schemes, there is also greater risk. Because of this, you should ideally, only consider these if you are an experienced investor or have a high-risk tolerance.

  Because small-cap companies are growth stocks, they usually keep their profits and reinvest them in the business. This results in low or zero dividends.

  As a result of the low liquidity of these stocks, the low volumes transacted at the time of purchase and sale may affect or alter the share price, which in turn affects the returns generated by the portfolio.

Small cap mutual funds can be a good choice if you are looking for higher returns and are willing to take on a very high level of risk. However, it is essential to note that small-cap companies are generally more volatile than large-cap companies, and the value of your investment in small-cap schemes may fluctuate significantly based on market conditions. Hence, ensure you figure out your risk appetite and invest accordingly.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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