A small-cap mutual fund is an equity mutual fund that invests at least 65% of the fund corpus in equity shares of small-cap companies. These funds are highly volatile and are suitable for investors who want to maximise portfolio returns. But they come with a higher risk. So, should you invest? Do the benefits outweigh the risks?
Get to the bottom of it by understanding what are small-cap mutual funds, how they work, benefits, taxation and things to consider if you decide to invest. Read on!
Small-Cap Mutual Funds are those that invest majorly in the equity shares of small-cap companies. Small-cap (Cap = Capitalisation) companies, according to SEBI, have a market capitalisation of less than Rs. 5000 crore and rank below 250 in the stock market. These companies have the potential to grow and produce considerable returns in a short period of time. Small-cap funds are riskier compared to large-cap funds. However, they also come with a set of benefits as listed below.
small-cap funds offer various benefits to their investors. Some of them have been discussed below:
One of the main advantages of small-cap funds is their potential for high returns in the long term. The returns can be higher in comparison to mid-cap funds and large-cap funds. This is because small-cap companies have a higher scope for growth and expansion in the future.
small-cap funds offer much-needed diversification in the portfolio. A diversified portfolio lowers the risk involved in investment. Funds can be invested in various sectors like FMCG, IT, financial services, etc., to mitigate portfolio risk.
Small companies always have a chance of merging with a large company or corporation. This leads to a substantial surge in the share price, thereby increasing the NAV (Net Asset Value) of the funds that invest in them.
Also Read: Small, Mid And Large Cap Funds: A Detailed Comparison Before You Invest!
Mutual funds offer returns to investors in two ways – dividends and capital gains. However, when it comes to small-cap funds, they rarely give dividends to their investors because any excess cash they are left with will be reinvested back in the business. So, a major chunk of returns in this category comes from capital gains.
Capital gains, in simple terms, are the increase in the price of mutual fund units held by the investors. Whenever an individual sells units of mutual funds at an increased price, he/she gets capital gains. It is of two types – short-term capital gains and long-term capital gains.
If the holding period is less than one year, then profits from small-cap funds are taxed under the short-term capital gains category. The rate of taxation is 15%. However, if the holding period is more than one year, then the gains are classified as long-term capital gains. LTCG of up to one lakh is tax-free, and any gains above this amount are taxed at 10% without indexation benefit.
If you want higher returns within a short period of time and are not risk-averse, you can invest in small-cap mutual funds. small-cap funds are highly volatile in nature. They are one of the riskiest mutual funds as they can give exorbitant returns to investors or bring substantial losses. So, these schemes are not at all suitable for risk-averse investors. However, aggressive investors might prefer these funds. Experts suggest that diversification of the portfolio can be a smart way of managing the turbulent nature of these funds. A lot of patience on the part of the investors is required while they are dealing with this category of mutual funds.
If you want less risk exposure, you can opt for more stable options like large-cap funds or large and mid-cap funds offered by Navi Mutual Fund. Start investing with an amount as low as Rs. 500 to fulfil your financial goals.
small-cap equity funds charge a fee on an annual basis from the investors to cover their operating expenses. It is called the expense ratio. SEBI has fixed the upper limit at 2.25% of the overall assets under management. The lower the charge, the higher will be the gains that an investor earns. So investors should look for funds that charge a low expense ratio.
These mutual funds may not be suitable for fulfilling the short-term goals of investors as these schemes are very volatile. That said, these funds can help in securing the long-term goals of an individual. Long-term goals that might align with these funds’ objectives are financing children’s higher education, building a retirement corpus, buying a house, etc.
The performance of a small-cap fund depends upon the efficiency of the fund managers as they take all the investment decisions after doing thorough research and analysis. Hence, it is vital that you check the track record of the fund manager before choosing to invest in a small-cap fund.
Also Read: 10 Best Small Cap Mutual Funds To Invest In 2022
Small-cap mutual funds are an interesting option suitable mainly for aggressive investors. These schemes can help you fulfil your investment goals. That said, before investing in small-cap mutual funds, make sure to consider crucial aspects, such as risk appetite, past returns of the funds, etc. Happy investing!
Ans: Mutual funds are a very safe investment option once someone understands them properly. Investors should not be worried because of the short-term fluctuations. All top-rated small-cap funds have high return potential if one is patient.
Ans: High volatility is the biggest deterrent of these equity funds. Small companies go for aggressive expansion early, so volatility in their share prices tends to occur. Nevertheless, as the company grows, it has the potential to become more stable.
Ans: Large-cap funds invest at least 80% of the fund corpus in the equity shares of top 100 companies with regard to market capitalisation. Whereas in small-cap funds, the fund manager must invest at least 65% of the pooled money in equity shares of companies ranked below 250 in terms of market capitalisation.
Ans: As small-cap funds primarily deal with small companies that are looking to expand. Hence these companies do not offer high dividends as any excess profit is reinvested back in the business. The returns outlook of small-cap funds in dividends is low to moderate.
Ans: small-cap funds do not come with a lock-in period. Investors can choose to redeem their units in a small-cap mutual fund scheme by placing a request with the asset management company (AMC) at their convenience.
Want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research? Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
10 Best Nifty 50 Index Funds in India to Invest in February 2023
What is the Nifty 50 Index Fund? Nifty 50 index funds are a type of passively-managed equi... Read More »15 Best Mid Cap Mutual Funds in India to Invest in February 2023
A mid cap mutual fund is a type of mutual fund that invests in the stocks of mid-cap companies. As ... Read More »5 Best Technology Mutual Funds in India (February 2023)
Technology mutual funds are sectoral mutual fund schemes that primarily invest in the stocks and de... Read More »What are Mutual Fund Returns and How to Calculate it?
Mutual funds are gradually becoming a popular investment option in India because of their many bene... Read More »What is Midcap Index – Features, Types and Why Should You Invest in 2023?
What is Midcap Index? A midcap index is a stock market index that has companies ranked between 1... Read More »Best Short Term Debt Funds to Invest in 2023
Short-term debt mutual funds are a type of mutual fund that invest in debt securities with maturiti... Read More »15 Best Pharma Funds to Invest in India 2023
Pharma funds are a type of sectoral funds that invest in pharmaceutical companies. Sectoral funds a... Read More »20 Best Liquid Funds to Invest in India (February 2023)
Liquid funds are debt funds that invest in short-term assets with a maturity period of just 91 days... Read More »15 Best Multi Cap Funds to Invest in India (February 2023)
Multi-cap mutual funds are the kind of funds which invest their corpus in stocks of large-cap, mid-... Read More »Index Fund – Types, Benefits, How does It Work and How to Invest in 2023
What is Index Fund? An index fund is a passively-managed mutual fund with a portfolio built to t... Read More »15 Best Small Cap Mutual Funds to Invest in India (February 2023)
Small cap mutual funds are open-ended equity funds that invest primarily in stocks of small cap com... Read More »Best Large and Mid Cap Funds to Invest in India 2023 – Taxation and Returns Calculator
Large and mid-cap funds are open-ended mutual funds that invest in stocks of large-cap and mid-cap ... Read More »Top 10 Chit Fund Schemes in India in 2023
Chit funds are one of the most popular return-generating saving schemes in India. It is a financial... Read More »10 Best Gold ETFs to Invest in India in February 2023
Gold ETFs or Gold Exchange Traded Funds are passively managed funds that track the price of physica... Read More »Top 10 Demat Accounts in India [Lowest Brokerage Charges]
A Demat account was created to eliminate the time-consuming and inconvenient procedure of purchasin... Read More »20 Best Index Funds in India to Invest in 2023 (Updated on 31st Jan)
What is an Index Fund? An index fund is a type of mutual fund or exchange-traded fund (ETF) that... Read More »Best Arbitrage Mutual Funds to Invest in India: Returns and Taxation
Arbitrage funds are hybrid mutual fund schemes that aim to make low-risk profits by buying and sell... Read More »Best SIP Mutual Funds To Invest In India (2023) – Its Types And Taxation
A Systematic Investment Plan (SIP) is a convenient way to invest a fixed sum in mutual funds. For i... Read More »10 Best Corporate Bond Funds in India 2023 – With Returns
Corporate bond funds are debt funds that invest at least 80% of the investment corpus in companies ... Read More »10 Best Banks for Savings Account in India (2023)
A savings account keeps your money safe, and lets you earn interest every quarter. There are many b... Read More »All information is subject to specific conditions | © 2023 Navi Technologies Ltd. All rights are reserved.
Start Small. Dream Big.
Start your Investment Journey with just ₹10