What are Small Cap Mutual Fund?
Small-Cap Funds refer to those mutual funds which primarily invest in companies which have been ranked below 250 in terms of market capitalization. Small-Cap funds invest in equity and equity-related instruments of companies to take advantage of their high growth potential. These funds allocate at least 65% of their total assets in small-cap equity and the rest can be invested in any of the large, mid or small cap equity.
List of 5 Best Small-Cap Mutual Funds 2020
We list the 5 best small-cap funds in India based on their overall performance in the past years.
|Scheme Name||1 Year Return||3 Year Return||5 Year Return|
|Axis Small Cap Fund||22.76%||15.63%||12.77%|
|Franklin India Smaller Companies Fund||-3.46%||4.51%||8.04%|
|HDFC Small Cap Fund||-7.19%||10.96%||10.47%|
|L&T Emerging Businesses Fund||-5.41%||9.72%||11.65%|
|Nippon India Small Cap Fund||-0.04%||10.25%||11.33%|
*All data as on January 08, 2020
Also Read: Types of Mutual Funds in India
Why Invest in Small-Cap Funds?
Small Cap companies are the ones which are yet to explore and expand their business models and therefore, have high growth potential, this makes them a riskier investment than mid and large-cap firms. However, with high risk comes the potential to earn high returns.
Small Cap funds do exactly that, they invest in small-cap companies and take advantage of the high growth potential and price volatility to make capital gains. They are managed by experienced and proficient fund managers who save investor’s time when they research.
Things to Consider Before Investing in Small-Cap Funds:
1. Risk Appetite: Compared to Large-Cap and Mid-Cap funds, Small-Cap funds have a high-risk element, as small-cap companies are highly market sensitive and prone to price volatility. A potential investor should carefully assess his risk appetite and then choose a fund accordingly. Though you can minimize the risk by staying invested for the long term, small-cap funds are meant for investors with a high-risk appetite.
2. Past Performance of the Fund: To reap maximum benefits from investment in small-cap funds, it is a good practice to have a look at the past performance of the fund under consideration. If the fund has performed well consistently in the past, that means the fund has been managed well and is expected to do well in the near future.
You can compare the 1-year, 3-year and 5-year returns of the fund with its benchmark and category returns as well. If the fund has generated attractive returns and also outperformed its benchmark and category returns, the fund can be opted for.
3. Diversification of Investment Portfolio: An investor should invest in a fund whose portfolio is diverse. A small cap fund that invests in companies from different sectors and industries is a good choice, as this hedges it against a possibility of downfall of any particular market.
While a concentrated portfolio increases the risk, over-diversification takes away the return potential. So it is important for a fund to be well-diversified to balance the risk quotient.
4. Investment Time Horizon: If you are looking for short-term gains, then investment in small-cap funds is not a good idea as small-cap companies are quite vulnerable to economic downturns and other types of market volatility. An individual should have a longer outlook to get the best out of their investment.
The past performance records of small-cap funds suggest that they are the best to invest in with a 5+ year investment horizon. Further, the power of compounding will also work in your favour if you stay put for the long run.
5. Expense Ratio of the Fund: Expense Ratio refers to an annual fee that an Asset Management Company charges to manage your assets. It is a specific percentage on your investment returns. You should choose a fund which has a low expense ratio, as high expense ratio decreases your Net Asset Value (NAV) thereby decreasing your effective payout at the time of redemption.
How to Invest online in Small Cap Fund?
- Sign Up/Sign In to Paisabazaar.com and go to ‘Direct Funds’
- Click on the section of ‘Small Cap Funds’
- Select the fund in which you want to invest and look at the details. You can also compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment.
- Click on ‘Invest Now’, select either Lump sum or SIP
Why Choose Paisabazaar?
- Trusted website, no commission charges and no paperwork
- You can compare more than 1,700 Funds at one platform instead of visiting the website of each AMC and then searching for numerous funds
- Easy to browse as Funds are segregated under Equity, Debt, Large Cap, ELSS, etc. You can further add filters of ratings, returns, fund houses
- Important scheme details such as latest Net Asset Value (NAV), expense ratio, assets under management, etc are also available on the portal, making it easier for consumers to pick a suitable fund.
Also Read: What is ELSS?
Frequently Asked Questions
Q. What is Net Asset Value (NAV) of a scheme?
Ans: Net Asset Value (NAV) of a scheme is the value at which the investor buys or sells units of the scheme. It also refers to value of assets after deducting the liabilities per unit.
Q. What is an Exit Load?
Ans: Exit load refers to the cost which the investor has to pay in case of premature redemption or withdrawals from the scheme.
Q. What is expense ratio?
Ans: Expense ratio refers to the cost charged by the companies on investors to manage a mutual fund or exchange-traded fund (ETF).
Q. What is a Systematic Investment Plan (SIP)?
Ans: Systematic Investment Plan (SIP) refers to a mode of investing into Mutual Funds wherein the investors are allowed to make investments in smaller amounts periodically instead of lump sums.
Q. Which are the best small cap mutual funds in India to invest in for a long-term investment of 10 or more years?
Ans: When you invest in small cap funds for a longer period of time, the chances of superior returns are doubled because these funds invest in smaller companies having a solid business plan. L&T Emerging Businesses Fund and HDFC Small Cap Fund are two hand-picked small-cap funds which can be fruitful in the long-run.
Q. Is it the right time to invest in small cap mutual funds?
Ans: Small-cap Mutual Funds are known for their risky nature as compared to other fund categories. However, you can invest in small cap funds provided that the investment is made for a longer period of time say 7-10 years. Longer horizon of investment enhances the fund’s ability to perform.
Q. Are small cap funds riskier?
Ans: Yes, small cap funds are riskier as compared to large-cap and mid-cap funds. This is because such funds have the assets invested into emerging businesses which are not established. Sometimes these businesses may fail to perform during market fluctuations.
Q. What is the difference between large cap and small cap?
Ans: Large cap funds are the investment schemes investing 80% of the assets into shares/stocks of companies with large capital (the top 100). On the other hand, Small cap funds are the schemes investing 65% of the total assets into shares/stocks of companies which have a small capital and are listed at 251st or below according to market capitalisation.
List of Actively Performing Small Cap Funds
Here is a list of small cap funds which are performing consistently for the investors:
(Data as on 12th Dec 2019; Source: Value Research)