For investors willing to accept higher volatility, small cap funds can offer potential growth opportunities over the long term. These funds primarily invest in companies with a relatively small market capitalisation. Due to their size, small companies often have higher growth potential, but they may also experience larger fluctuations in value compared to large-cap or mid-cap companies.
Understanding small cap funds
Small cap funds focus on emerging companies that may be in the early stages of growth. These companies can offer substantial growth potential, but they are also more sensitive to market cycles and economic changes. Investing in small cap funds requires a long-term perspective and tolerance for short-term fluctuations.
Key points to consider
- Potential returns and risk: Small cap funds have higher potential returns than large-cap funds, but the risk of price swings is also higher. Investors should be prepared for periods of underperformance during market corrections.
- Investment horizon: A long-term horizon of at least five to seven years is generally recommended for small cap funds to allow time for potential growth to materialise.
- Diversification: While investing in small cap funds, consider maintaining a diversified portfolio that includes large-cap and mid-cap funds to manage risk.
- Regular investment through SIPs: Systematic investment plans can help spread risk over time by averaging the purchase cost of units. Using an SIP mutual fund calculator can help estimate potential corpus growth. Keep in mind, though, that these returns are not guaranteed, but only projections.
Benefits of small cap funds
- Opportunity for high growth potential over the long term.
- Exposure to emerging businesses that could outperform larger, established companies.
- Can complement a diversified investment strategy for aggressive investors.
Considerations
- Potential for significant short-term volatility.
- Liquidity of underlying stocks may be lower, which can affect fund performance during market stress.
It is advisable to consult a financial planner or investment advisor before investing in small cap funds to ensure the investment aligns with your goals, risk tolerance, and investment horizon.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
