What Is A Small-Cap Mutual Fund and How Does it Work?

In mutual fund investment options, small-cap mutual funds stand out as a popular choice for individuals seeking higher growth potential from emerging companies. These funds offer extensive opportunities for wealth creation over time, though they may also experience higher fluctuations in the short term.

So, what are small-cap mutual funds? Let us explore.

What are Small-Cap Mutual Funds?

Small-cap mutual funds are mutual fund schemes that invest at least 65% of their total investment amount in equity and equity-related securities of small-cap companies.

Small-cap companies refer to companies that have a market capitalisation less than ₹5000 crore and rank below the top 250 companies in terms of market value.

Now, let us break this into simple concepts.

Market capitalisation refers to the total value of a company’s share in the stock market.

Based on this value, companies are classified as follows:

How Do Small-Cap Mutual Funds Work?

Just like any mutual fund, a professional fund manager pools in money from a large number of investors and invests it in selected stocks. In the case of small-cap mutual funds, the fund manager specifically invests in small-cap companies.

As discussed earlier, at least 65% of the fund’s total assets are invested in equity or equity-related securities of small-cap companies.

You can purchase units of a small-cap mutual fund through a lump sum or a Systematic Investment Plan (SIP). The mutual fund’s value can be tracked by its Net Asset Value (NAV).

You can choose to redeem your benefits by selling the units at a higher NAV or holding them longer to gain more value over time. Depending on the type of mutual fund you have chosen, you might also receive regular payouts like dividends.

Key Features of Small-Cap Mutual Funds

• High Growth Potential - Investments made in small-cap companies of developing businesses get opportunities to grow and merge with large companies.
• Highly volatile and risky - As the companies are in their development stages, there can be significant downside risks in the short term. They are highly volatile, and prices can increase or decrease sharply.
• Long-term investment - As short-term price fluctuations affect overall performance; small-cap mutual funds are suitable for individuals seeking long-term investment.
• Diversification - Mutual fund managers invest the amount in many small-cap companies to reduce the overall risk of the portfolio.

Wrapping Up

Small-cap mutual funds invest in equity and equity-related securities of small-cap companies. It is suitable for investors who can afford short-term risks, looking to diversify their portfolio and seeking long-term investment benefits.

These funds may go through sharp ups and downs, but with patience, they can give higher gains over time. So, if you are planning to invest in small-cap mutual funds, make the right choice, stay invested and allow it to grow!