small cap mutual fund

Benefits to know: Why one should Invest in Small Cap Mutual Funds

Small cap mutual funds invest in companies whose market capitalization is relatively smaller. These companies, although less established, can have a significant growth potential. The funds are targeting to exploit the growth potential of the smaller companies that are more volatile but can provide good returns if they have growth over time. 

Characteristics of Small Cap Mutual Funds:

Growth Potential: Small cap companies are mostly in the growth stage and might have enormous growth potential, which therefore brings about tremendous returns on investment.

Higher Risk: Since the companies are comparatively smaller, they are prone to fluctuations in the economy, competition and other factors. Therefore small cap stocks are mostly volatile in comparison to large-cap stocks. 

Diversification: Investing in a small cap mutual fund will enable an investor to invest in a basket of small companies spread across various industries. The risk would be relatively lesser than that of investing in individual stocks.  

Long-Term Focus: Small cap mutual funds have a long investment horizon and demand patience as the smaller companies grow and mature. 

Investment in small cap funds may provide several benefits: 

High Growth Potential: Usually small cap companies are at early stages of growth and thus in the long run, their stock price may be appreciated considerably. Once these companies grow and expand, they can be quite appreciable in terms of their market value. 

Diversification: A small cap mutual fund gives diversification to your portfolio by spreading your investments across many companies. It reduces the dominance of one company over all other returns.

Identify future multibaggers: The giants of large cap were once small cap. Small Cap mutual funds are always on offer for you to grab as an early investor to future multibaggers.

Innovation and Disruption: Small cap companies are likely the innovators and disruptors in industries. They could create products and services that are innovative and would eventually have high growth and thus significant value creation.

Long-term wealth creation: Long-term investment horizon helps you reap the compounding benefit, wherein your initial investment grows exponentially with time. Long-term investments can help you ride through short-term market fluctuations and benefit from long-term growth.

But small cap mutual funds are associated with higher risks:

Volatility: The small cap mutual funds are volatile; hence prices can become very high or low in the short run. 

Liquidity Risk: Also, the small cap stocks may be illiquid, hence very hard to buy or sell in a short time.  

How to Overcome volatility risk:

Investment Perspective: The above risks can be minimized by investing in a small cap mutual fund for the long run so that the short-run fluctuations are smoothed out by the market.

Diversification: Spread your investments in various funds to reduce the risk. 

Professional Management: A fund that is managed by top-rated money managers who have a track record of selecting and managing small cap stocks. 

Regular Review: Keep your investments under constant review and rebalance your portfolio as and when needed.

Consider your risk tolerance and financial goals to make the right investment decision in small cap mutual funds. Remember, although these funds can give you the potential for higher returns, they have higher risks. It is, therefore, necessary to research or consult with a financial advisor before investing.

FAQs on Small Cap mutual Funds and reason to invest:

Is it good to invest in small cap mutual funds?

Yes, for those seeking higher growth potential, it is a good idea to invest in small-cap mutual funds. However, one needs to understand the risks associated with this investment, such as higher volatility and liquidity risk. To reduce these risks, one should consider a long-term investment horizon, diversification, and professional management.

What are the advantages of a small cap mutual funds?

Small-cap mutual funds are highly growth-oriented since they are at the early stage of growth and innovative. They diversify your portfolio and can outperform large-cap funds in the long run. However, they are more volatile and less liquid.  To mitigate risks, invest for the long term, diversify, and consider professional management. 

Which small cap mutual fund gives the highest return?

Small cap mutual funds have great growth potential, but they carry higher risk, and one needs to look into the long-term investment horizon, diversification, and professional management.