Small Cap Mutual Funds are funds which invest in startup companies or developing firms. Small Cap funds have high risk. “CAP” means the size of that company in which the fund will invest. Most of Small Cap funds invests 40%-10% in large-cap or mid-cap funds to provide some stability in investment.
Factors you should check before selecting small-cap funds-
- Risk Factors- Small Cap funds give high returns but they also have huge risk market can fluctuate anytime. The Net Asset Value (NAV) of a Small Cap Fund suffers a lot when the market is not doing well. Though it is a great investment path for those who can accept more risk and also ready for more aggressive growth.
- High Returns- In the last few years, the market had seen that small-cap funds are really doing well for this reason so many investors got attracted about small-cap funds and invested in this category. It is presumed that small-cap funds have hidden potentiality to be a “multi-bagger” (Indian Financial jargon for equity stock which gives a return of more than 100%) one day.
- Expense Ratio- While we invest in small-cap funds or anywhere we don’t check the expense ratio. But we should check it carefully. Small Cap Equity funds charge annual fees for managing your money which is called the expense ratio. SEBI has set the upper limit of 2.50% for the expense ratio. The lower expense ratio gives into higher returns at the end of the day. So if you want to invest in a small-cap fund find a fund which has the lower expense ratio.
- Investment Tenure- Small Cap Mutual Funds give high returns but if you invest in a short term you can get that much of high return you should invest for a long time for the high return. Your investment tenure should be 7-10 years minimum.
- Meet Your Long Term Goal- Small-cap equity funds are best for those who have long term goals like- investing for your daughter’s education, investing for your retirement or your dream vacation. These funds have delivered high returns compared to the benchmark. Maybe this fund has high risk but the return is worth of risk.
- Tax Gains- If you redeem units of small-cap equity funds you make capital gains, which is taxable. The tax rate depends on the investment time; this period is called holding period.
One year capital gains are called short term capital gains, short term capital gains taxed at the rate of 15%, but if you do invest for more than one year. LTCG (Long Term Capital Gains) in excess of Rs.1 Lakh will be taxed at 10% without the benefit of indexation.
Summary of Small Cap Funds
|Fund||What are they?||Risks||Ideal For|
|Small Cap Fund||Invest in small companies, growing firms, start-up a business which may have higher growth potentialities.||Compared to mid-cap and large-cap funds have more risk.||Investors who can tolerate more risk and are looking for more aggressive growth.|
Top 5 Small-Cap Funds of 2019
|Scheme Name||1 Year returns (%)||3 Year returns (%)||5 Year returns (%)|
|L & T Emerging Business Fund||-8.88||17.5||NA|
|SBI Small Cap Fund||-10.6||15.41||30.67|
|Reliance Small Cap Fund||-7.09||14.35||30.04|
|HDFC Small Cap Fund||-0.08||16.89||20.83|
|Franklin India Smaller Companies Fund||-11.7||9.93||23.65|
Benefits of Small Cap Funds
- Small Cap fund has aggressive growth and it also gives high returns on investment.
- Small Cap funds have diversification in fund’s portfolio if large-cap funds don’t work well small cap will grow quickly and will give you a good return.
- As we know small caps funds invests in small companies so if there is any change in the market they can adapt it easily.
- Small companies tend to be more focused then large companies due to their size and age they aim to grow their business larger.