Small-cap mutual funds: Is this high-risk, high-reward investment worthwhile?

What is a small-cap mutual fund and is it right for you? Read on to know more.

In this article, we will take a closer look at investing in Small-Cap mutual funds, and provide some tips for choosing a small-cap mutual fund that is right for you. 

Small-cap mutual funds invest in small-cap firms (those with less than Rs 5,000 crore in market capitalisation). They are the funds that invest mostly in small-cap equities, with just a tiny share invested in bigger market categories. They tend to outperform big or Mid-Cap funds, but they are significantly riskier in contrast. 

Who should invest in small-cap mutual funds? 

It is suitable for investors who are already in the investing market and looking for more ways to diversify their investments. Given that small-cap funds can be risky in nature, it ensures that your investments are spread across various other forms of investments and not small-cap funds alone.  

These investments are much riskier than mid or Large-Cap funds, given that they invest in smaller company stocks that are yet to experience growth. Therefore, it can suit the investors who are willing to take the risk or have the risk appetite to face sudden lows of the fund.  

Small-cap funds can see sudden fluctuations in the short term, but they are known to perform well over the long term. This enables them to be the most suitable investors who can stay invested in the funds for the long term.  

Factors to consider before investing 

The factors to consider before beginning to invest in top small-cap funds are: 

Risk Factor: Small-cap mutual funds are highly volatile in nature when compared to mid or large-cap mutual funds. Moreover, the net asset value of small-cap mutual funds fluctuates in a broad range. 

Investor Expertise: Small-cap mutual funds can deliver high performance on a combination of good strategy and observation. But, these funds are known to be highly volatile. Therefore, it is advisable to investors with good mutual fund investment expertise.  

Investment Term: These types of mutual funds are most suitable for investors with a long investment time horizon. It is mostly not suitable for investors with a short investment tenure.  

Risks Involved While Investing in Small-Cap Mutual Funds 

High Volatility: One of the biggest risks connected with small-cap funds is that their prices might fluctuate dramatically. This makes them extremely unstable to invest in because the losses can be substantial if the price does not move in accordance with your expectations.  

Risky Performance: The performance of small-cap funds is determined by a number of factors, including stock selection, stock performance, and timely intervention by the fund manager to balance the fund. Since there are so many variables at play, the performance of small-cap funds may not be as impressive as one might think.  

Low Liquidity: Small-cap mutual funds are rarely invested in by institutional investors Even among retail investors, though, engagement is typically low. This can cause liquidity concerns and make it more difficult to buy or sell units in the market. 

Top 5 mutual fund schemes 

Axis Small Cap Fund Direct-Growth 

Fund Performance: The Axis Small Cap Fund has given 34.54 per cent annualised returns in the past three years and 27.63 per cent in the last 5 years The Axis Small Cap Fund belongs to the Equity category of Axis Mutual Funds. 

Minimum Investment Amount: The minimum amount required to invest in Axis Small Cap Fund via lump sum is Rs 100 and via SIP is Rs 100. 

Quant Small Cap Fund Direct Plan-Growth 

Fund Performance: The Quant Small Cap Fund has given 47.15 per cent annualised returns in the past three years and 31.04 per cent in the last 5 years The Quant Small Cap Fund belongs to the Equity category of Quant Mutual Funds. 

Minimum Investment Amount: The minimum amount required to invest in Quant Small Cap Fund via lump sum is Rs 5,000 and via SIP is Rs 1,000. 

Nippon India Small Cap Fund Direct-Growth 

Fund Performance: The Nippon India Small Cap Fund has given 45.8 per cent annualised returns in the past three years and 27.32 per cent in the last 5 years The Nippon India Small Cap Fund belongs to the Equity category of Nippon India Mutual Funds. 

Minimum Investment Amount: The minimum amount required to invest in Nippon India Small Cap Fund via lump sum is Rs 5,000 and via SIP is Rs 100. 

Tata Small Cap Fund Direct-Growth 

Fund Performance: The Tata Small Cap Fund belongs to the Equity category of Tata Mutual Funds. The fund has given 33 per cent annualised returns in the past one year.

Minimum Investment Amount: The minimum amount required to invest in Tata Small Cap Fund via lump sum is Rs 5,000 and via SIP is Rs 150. 

HDFC Small Cap Fund Direct-Growth 

Fund Performance: The HDFC Small Cap Fund has given 42.09 per cent annualized returns in the past three years and 22.4 per cent in the last 5 years The HDFC Small Cap Fund belongs to the Equity category of HDFC Mutual Funds. 

Minimum Investment Amount: The minimum amount required to invest in HDFC Small Cap Fund via lump sum is Rs 100 and via SIP is Rs 100. 

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.