Introduction

Investing in Small Cap Mutual Funds offers an exciting and potentially rewarding opportunity. These funds focus on companies with smaller market capitalizations, typically ranging from Rs.1000 to Rs.15000 crores. Small-cap funds have a reputation for growth potential, since smaller companies often grow faster than their larger counterparts, giving investors a chance to capture capital appreciation. These companies’ agility and flexibility drive innovation and market disruption, creating unique opportunities for investors. In this article, we will explain the key features of small-cap funds, examine the benefits and risks, and list the top 7 small-cap funds that could lead you toward a brighter financial future.

What are Small Cap Funds?

• Companies having market capitalizations ranging from Rs.1000 to Rs.15000 crores are the focus of small-cap funds.
• These smaller companies frequently expand more quickly than their larger competitors, increasing the likelihood that investors will see capital growth.
• Smaller businesses are usually more flexible and nimble, which spurs innovation and creates disruptions in the market.
• Their agility allows them to react swiftly to shifting market trends, which spurs substantial growth and exclusive investment prospects.

Identifying the Key Features of Small Cap Funds

When investing in small-cap funds, it’s important to grasp the unique aspects that set them apart from other types of funds. Here’s a more detailed explanation of each point:

High Growth Potential

• Small-cap funds focus on companies in the early stages of growth. These businesses aren’t always household names, but they tend to have ambitious plans and are actively expanding their market presence.
• Due to this growth phase, small-cap stocks often experience rapid price increases, presenting significant capital appreciation opportunities for investors.
• However, with this high growth potential be aware of the greater risks, as these companies are more vulnerable to market fluctuations and competition.

Diversification

• Small-cap funds typically invest across a broad range of industries and sectors, which offers investors a diversification advantage.
• By spreading investments across various fields, these funds reduce the risk that comes from relying too heavily on a single company or industry.
• This wide-ranging approach is especially beneficial given the volatility often associated with small-cap stocks.
• By diversifying, you can help cushion your portfolio against downturns in specific markets or sectors.

Higher Risk

• Although small-cap funds offer significant growth potential, they also carry more risk.
• Small-cap companies generally have less established business models, lower revenues, and smaller customer bases compared to larger companies.
• This makes them more susceptible to market volatility, economic downturns, and competitive pressures.
• Consequently, small-cap stock prices can be subject to significant swings within a short period.
• .As an investor in Small Cap Mutual Funds, always be prepared for this higher volatility and have a greater tolerance for risk.

Active Management

• Many small-cap funds depend on active management, with fund managers carefully selecting which companies to invest in.
• This approach allows managers to focus on specific targets, like revenue growth, industry trends, management expertise, and competitive positioning.
• Active management can be a real asset in the small-cap space, where understanding individual companies and industries can lead to better investment choices.
• The hands-on management style often leads to better performance but typically comes with higher fees compared to passive funds.

Top 7 Best Small Cap Schemes

Bandhan Small Cap Fund

Investment Objective

This Scheme invests primarily in small-cap stocks and equity-linked instruments to provide long-term financial appreciation.

Fund House: Bandhan Mutual Fund

Launch Date: 25.02.2020

AUM: Rs.4384.9 Crore (as of 31.03.24)

CAGR: 37.32%

ITI Small Cap Fund

Investment Objective

This Scheme primarily invests in equity and equity-related instruments of small-size companies to produce capital appreciation.

Fund House: ITI Mutual Fund

Launch Date: 17.02.2020

AUM: Rs.1770.83 Crores (as of 31.03.24)

CAGR: 24.22%

Nippon Small Cap Fund

Investment Objective

This scheme invests mostly in small-size firms’ stock and equity-related securities to produce long-term financial appreciation.

Fund House: Nippon India Mutual Fund

Launch Date: 05.09.2010

AUM: Rs.45749.06 Crores (as of 31.03.24)

CAGR: 22.23%

Quant Small Cap Fund

Investment Objective

This scheme invests in a well-diversified portfolio of moderately risky fixed-income assets to produce both current income and capital appreciation. Exposure to the money market and equity products may occur.

Fund House: Quant Mutual Fund

Launch Date: 24.11.1996

AUM: Rs.17348.96 Crores (as of 31.03.24)

CAGR: 13.44%

Axis Small Cap Fund

Investment Objective

This scheme invests in a well-diversified portfolio of moderately risky fixed-income assets to produce both current income and capital appreciation. Exposure to the money market and equity products may occur.

Fund House: Axis Mutual Fund

Launch Date: 05.11.2013

AUM: Rs.19029.59 Crores (as of 31.03.24)

CAGR: 23.56%

Tata Small Cap Fund

Investment Objective

This scheme invests primarily in small-size firms’ stock and equity-related securities to produce long-term financial appreciation.

Fund House: Tata Mutual Fund

Launch Date: 02.11.2018

AUM: Rs.6236.38 Crores (as of 31.03.24)

CAGR: 26.17%

Canara Robeco Small Cap Fund

Investment Objective

The program primarily invests in small-cap equities to produce financial appreciation.

Fund House: Canara Robeco Mutual Fund

Launch Date: 05.02.2019

AUM: Rs.9402.62 Crores (as of 31.03.24)

CAGR: 27.23%

Who should invest in the Small Cap Category?

Small Cap Mutual Funds offer high growth potential but also come with increased risk. Here are the types of investors who might benefit from investing in these funds:

Growth-Oriented Investors

If you’re after high capital appreciation and don’t mind taking on more risk for potentially greater returns, you might find small-cap funds appealing. These funds typically focus on companies in their early growth stages, leading to significant upside potential.

Long-Term Investors

Since small-cap stocks tend to be volatile in the short term but often outperform over longer periods, you could benefit from these funds if you plan to invest for 5 years or more.

Investors with High-Risk Tolerance

If you can handle larger fluctuations in your portfolio’s value, small-cap funds could be a good fit. These funds tend to experience sharper drops during market downturns but can also rebound strongly during recoveries.

Diversification Seekers

If you want to diversify your portfolio, small-cap funds provide access to a different segment of the market. Adding them to your existing mix of large-cap or mid-cap funds can give you a broader range of opportunities.

Investors Interested in Innovation

If you’re drawn to emerging trends and disruptive technologies, you might enjoy investing in small-cap funds. These companies are often at the forefront of innovation, creating new products, services, or business models.

Active Investment Enthusiasts

For investors who prefer an active approach to investing, where managers carefully select companies with high growth potential, small-cap funds might be ideal for you.

Conclusion

Smaller businesses are frequently creative and flexible; small-cap funds provide strong growth potential through their investments. Invest through a SIP for a systematic and disciplined approach. If you have a long-term vision and are fine with greater risk, these funds might be a terrific addition to an investor’s portfolio. Small-cap funds have more volatility even if they can yield substantial gains. Think about financial goals and risk tolerance before investing. They are appropriate for long-term, growth-oriented investors as well as diversifiers.