Understanding Small Cap Funds

There are four types of mutual funds available in the market, which include large-cap, mid-cap, multi-cap, and small cap. Each fund has its own pros and cons and it is important for you to understand the same before making an investment decision.

What is a small cap fund?

Small-cap funds are the funds that invest into the stocks of small-sized companies. These companies are young and have the ability to expand aggressively.

The companies are also vulnerable to an economic downturn and hence are highly volatile.

Why should you invest?

The reason behind investing in small-cap funds is their ability to generate high returns. These companies are small and have a huge potential to grow.

They outperform the large-cap funds during a bull market and generate high returns.

Who should invest?

Investors with a high-risk appetite should choose to invest in these funds. Since the companies are small, the risk associated with the same will be high, and the returns will be impacted by the market volatility.

Is there any tax liability?

The fund is equity-oriented, which means it will be taxable. The fund invests into the stock of companies and there will be capital gain tax applicable on the same.

In case of short-term capital gain, the investor will be taxed at the rate of 15% and in case of long-term capital gain; the tax rate will be 10%, on an amount exceeding INR 1 lakh in a financial year.

Things to consider while investing

Before you invest in a small cap fund, you need to look at the long-term value of the fund. Look at the track record for the past five to ten years and access the risk associated with the same.

You need to consider the amount you wish to invest and the time horizon you want to remain invested for. Keep your risk appetite in mind when choosing the fund.

How should you select a small-cap fund?

Selecting a fund for investment can be a tedious task; it requires knowledge of the market and research of the funds. However, you can start by comparing the returns generated by the funds over a period.

In addition, understand the investment philosophy of the fund, so that you know how the fund managers handle the market cycles. Ultimately, a long-term investment horizon helps in generating high returns.

What are the best small-cap funds?

We have listed down few of the best small-cap funds that you can think about investing. For more details, set-up your account and talk to our financial advisor today:

• HDFC Small and Midcap Fund Growth
• Reliance Small Cap Fund Growth
• SBI Small Cap Fund Growth
• L&T Emerging Businesses Fund Growth
• Kotak Small Cap Growth

Comparison with large-cap and mid-cap funds

Large-cap funds are the funds, which invest in the stock of companies that have large market capitalization. These companies are secure and stable and they carry low risk and generate lower returns compared to small-cap and mid-cap funds.

A mid-cap fund carries a slightly higher level of risk and generates returns that are higher than those of a large-cap fund. The risk associated with the same is less than that of a small cap fund.

Small cap funds invest into smaller companies, which have the ability to grow and carry the highest risk. They generate the highest returns in a bullish market and are the most affected during the bearish phase.

Consider the different types of funds available in the market and choose the one that perfectly fits your investment criteria with regard to the amount, time horizon and long-term goals.

Common mutual funds investment mistakes

To ensure the investments you make help you toward a financially secure future, you must avoid certain investment mistakes that a lot of newcomers end up making. Mistakes such as:

Not Reviewing their Investments:

Once an investment is made, many investors stop there and forget to keep track of their scheme performance. Reviewing your investments help you identify and weed out underperforming funds, understand the market conditions which will help you figure out the correct asset allocation in the future. Failing to review can cost you a fortune.

Fear of Missing Out:

Never invest in schemes on a notion of “others are investing” or just because “market is Up”. Before taking any decision you have to do research, lay down your investment plan and understand the best possible schemes that will help you achieve your goals and help you grow your investments.

To read the entire list of common mistakes that you should avoid, check out 10 mistakes to avoid while investing in mutual funds.

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