Small Cap Mutual Funds: Know Your Entry Zone

Published by Sharekhan Education | June 27, 2021

Small Cap Mutual Funds: Know Your Entry Zone

Investing in direct equity needs a lot of knowledge, skill, time and patience. With so many types of stocks to choose from it becomes a challenge if you are not knowledgeable enough. This means that you could end up losing money instead of making some. You thus need to be actively involved and vigil to meet success here. But what if you don’t possess the requisite skills nor have the time to do so? Mutual funds can help you here. With the various types and sub-types you can benefit from equity investing without having to police your own stocks.

We would like to put up a small disclaimer here: investing through mutual funds though simple does not mean that you can simply ignore the basic rules of investing. NO!! You need to follow the basic investing rules and invest keeping in mind your risk profile, investment objectives and time to goals. Of course, all this based on the asset allocation that is worked out to achieve that goal i.e. how much into equity and how much into debt.

Having taken this crucial decision (Asset Allocation), the next variable that you need to consider is market capitalization, i.e., deciding what goes into the equity portion of your portfolio: Large cap, Midcap or Small cap?

Of the three, small cap companies have the potential to deliver higher upside returns in the long term and can show remarkable growth in a brief period of time. They carry a high level of risk, are more volatile in the short to medium term, and even the slightest market volatility can hugely impact their share prices.

It is this exceptional growth that lures many an investors into the small cap zone. So if you are looking at encashing your luck in small cap territory but picking the right stock is not your cup of tea then mutual funds may give you an entry into this zone. Knowing whether to take a position in small cap funds or not, or Knowing whether you are suited to take the risks associated with small cap funds or not, is vital for the success of your investment plan. Let usthusexplore Small Cap Mutual Funds and get to know them better.

Small cap Mutual Funds:

As the name suggests is a fund that invests a major portion of its investible corpus i.e.65% of its total assets into equity or equity-related instruments of small-cap companies that rank 251 onwards in terms of full market capitalization.

Small-cap funds carry a high level of risk and even the slightest market volatility can have a huge impact on the prices of the small-cap companies in their portfolio and this in turn can reflect in the NAV of the scheme.An important point that needs your attention here is that if you are a risk taker or ready to take some risks then you may allocate a small percentage of your portfolio to small cap funds (don’t put all your eggs in one basket); but if you can’t then look for funds that suit your temperament. Small cap funds generally deliver growth if held for more than 7 years, so if you are planning to include them in your portfolio you need to hold them for a longer term. As the returns of these funds are affected by market volatility it is advisable to look up the funds, do a little research i.e. check on the fund house, the fund manager and the past performance to name a few, before you short list and invest in them.

Summary:

To summarize we can say that small cap funds have the potential to deliver better returns in the long run but are riskier and more volatile than the rest. If you have the courage to tolerate such volatility and of course have a longer investment horizon (more than 7 years) and keeping in mind diversification norms, you can take an entry in that zone.

By enrolling yourself in this stock market course, you can learn the various aspects of trading in Futures and Options.

Happy learning….