Should you invest in small cap mutual funds?

Small-cap mutual funds invest in small companies who are either start-ups or are still in its development stage. So the objective of the mutual fund manager is to search for the gems who have potential to grow in future. As there is room for growth over a long-term, small-cap stocks tend to give good returns. As per SEBI (Securities and Exchange Board of India), mutual funds dedicated towards investment in small-cap stocks must invest minimum 65 per cent of its assets in equity and equity-related instruments of companies who rank 251st and above in terms of market capitalization. It is being observed that people usually look at mutual funds only in the returns point of view and that too, the returns that show how the mutual fund has done in the past and is no way the guarantee towards its future performance. Yes, past performance is one of the parameters. However, it is not the only parameter to select any mutual fund.
 
As you may have understood, what is the objective of small-cap mutual funds and where your investments are applied, the question is whether is it a suitable investment for you or not. Whether it is a suitable investment or not depends on two major factors, first is your risk appetite and second being your investment time horizon. Investment in a small-cap mutual fund is a risky proposition there is a need to assess your risk appetite and as it provides better returns in long-term time horizon is also important.
 
If you wish to park your money for say three years, even if your risk appetite permits you to invest in small-cap MFs, it won’t be advisable to do so. On the other hand, if you wish to park your money for say 10 years, but your risk appetite doesn’t permit you to invest in small-cap MFs, then it would be wise to stay away from it. It is advisable to invest in small-cap MFs only if you risk appetite permits and your investment time horizon is long.