If you are investing for the long term, equity mutual funds are a viable choice of investment. Equity can help you earn high returns. And, even though the risk involved is a bit high, a longer investment horizon helps you balance out the market volatility. Among equity funds, there are various options like large, mid, and small cap funds, based on the market capitalization of stocks. While large and mid-cap stocks have been popular among investors because of their good performance and ability to deliver decent returns, the third option – small cap funds are also gaining traction these days.
Keep reading to know more about small cap mutual funds and if you should invest in them for the long term.
What are small cap mutual funds?
As per the categorization of the Securities and Exchange Board of India (SEBI), companies ranked 100 and above are large cap companies. The ones between 100 and 250 are mid cap companies. Small cap funds are those that invest in the stocks of companies that have been ranked below 250 in market capitalization. These are the small players that may be new and emerging in the market but have a great potential for growth. As a result, they carry high risk as the chances of them succeeding are a bit of a gamble. But because of their likely potential and scope of growth, they can help you earn solid returns too.
Small cap mutual funds invest at least 65% of their assets in small cap companies. These are susceptible to extreme market fluctuations as they perform well in bullish markets but also experience a drop during market lulls.
Are small cap mutual funds ideal for long-term investors?
Small cap mutual funds can be the most suited for long-term investors with an investment horizon of at least 7 to 10 years. As mentioned before, small cap funds can be volatile and show extreme fluctuations. So, a longer term can be useful to ride out this volatility. These funds may take a longer investment period to generate stable returns. Moreover, they are also quite risky. So, if you have a low risk appetite, they may not be suitable for you. The most important thing to remember here is that small cap companies require time to grow and excel. This may seem frustrating to most investors. So, patience is key when adding them to your investment portfolio.
Moreover, it may be advised to invest in them through a SIP or systematic investment plan. This will further help you benefit from rupee cost averaging and lower the risk that comes with a lump sum investment. This way, you invest a fixed amount of money in your regular SIP. So, when the market is high, you buy fewer units, and when the market is low, you buy more units, averaging out your cost of investment.
To sum it up
Small cap mutual funds are suitable for long term investors. But it is crucial to note that they can be extremely risky. So, be mindful of your choice and invest in them only if you have the appetite for such risk. The Tata Capital Moneyfy app has many mutual fund schemes – large, mid, and small cap, that you can consider investing in as per your goals, investment horizon, and tolerance to risk.