Small Cap Mutual Funds

Small cap mutual funds are invested in companies that below top 250 stocks in the exchange as per their market capitalisation. Small cap mutual funds have turned out to be a popular investment option due to their high returns. Here, we will explore what they are all about and how they can help build your investment portfolio and if they are the right choice for you.

The capitalisation of the company where you invest in is one of the essential variables while deciding what goes into your equity portfolio.

Small Cap Funds invest in all companies expect the top 250 in terms of market capitalisation. Thought these funds are relatively riskier and volatile in short to medium term than other equity oriented funds, they promise a higher upside of return in the long term.

The stocks of these companies can possibly twofold or even triple up over an exceptionally brief period. However, like most of the investments in the market, the risks always persist. It is advised that you keep a bit of the best small cap mutual funds in your investment portfolio to make sure that you are not missing out on the returns that you can get from them.

Small-cap mutual funds are liable to a sufficient bit of risks in the market, and it is recommended that investors look at all the factors that influence the performance of these funds. You have to think about factors such as how much risk you are willing to take, what happens to be your investment goal etc.

Following are a portion of different factors that you should recollect before deciding to invest in the best small-cap funds:

• Investment risks:

  It is quite true that even the best small cap mutual funds pose a significant bit of risk, but then again, there are some funds that can oversee these risks to provide fruitful returns. One should look at the various funds that have performed better than Small Cap benchmark and other small cap funds to make sure that they are getting good returns that pose less risk.

• Investment return:

  Small cap mutual funds tend to yield high returns and can be a great addition to your portfolio. With a significant bit of risk, you can ensure that these funds act as those buffers in your portfolio that provide high value if things work out in the market for them.

• Investment cost:

  Small-cap equity funds come with an expense so that your investment is well‐managed. This is called the expense ratio of a fund. The guidelines laid out by SEBI limits the expense ratio of a fund at 2.50%. It is advisable that one looks at net return post expense while shortlisting a fund.

• Investment goals:

  When the market starts falling, even the top small cap mutual funds can face significant erosion with their returns. Hence, if you need to make the most out of your investment, you should invest for a long term goal, which might come up in up to 7-10 years, such as the education of your children, saving for your days of retirement, buying a home, and more.

• Taxation:

  Capital gains earned while redeeming small-cap equity funds are taxed depending on how long amount was kept invested for, and this investment period is called a holding period.
  Capital gains from redemption that are on the holding period of up to one year are known as short term capital gains (STCG), and they are taxed at 15%. Now, the holding period of more than one year is called long term capital gains (LTCG), and when they exceed one lakh, they are taxed at 10% on the amount exceeding one lakh.

People who are ready to take some risks in order to make the most of their portfolio should think of investing in small cap mutual funds. These funds are known to offer high returns when the market is bearish. However, when the market sees a downfall, these funds can be significantly affected.

It is recommended that you have a small portion of your investment portfolio dedicated to the best small cap funds.

Here, we will look at some of the top performing small cap funds based on values of performance indication. These returns are based on three‐year returns of these funds.

It is quite easy to invest in Small Cap Funds on ET Money. Here are the steps that you can follow:

• Download ET Money app or visit https://www.etmoney.com/mutual-funds/equity/small-cap/36
• Find the Small Cap Fund you want to invest in
• Click on Invest Now, enter the amount and mode of investment
• Provide basic details like Pan & Bank Details & you are all set