What are Small Cap Funds

What are Small Cap Funds?

Small cap mutual funds are investment options that focus on investing in the stocks of companies with small market capitalization. As per the Securities and Exchange Board of India (SEBI), small cap companies are those with a market capitalization below the top 250th company in terms of full market capitalization. 

These companies have a high potential for growth but also carry higher risks due to their volatility. Small cap funds are designed to help investors invest in such companies and potentially earn higher returns in the long run. In this article, we are going to learn about what are small cap funds.

This article covers: 

Small Cap Mutual Funds Meaning

Small cap mutual funds are an investment category that focuses on investments in companies with a market capitalization below Rs. 5,000 crores. Small cap companies should rank 250 or more than that based on market capitalization. SEBI states these funds should invest at least 65% in small cap stocks. 

Small cap funds tend to have a higher risk percentage than large-cap funds. Investment returns are also something to consider when investing in small caps. These funds tend to have a higher rate of returns than large caps.

Small cap companies have a lower share price compared to mid-cap and large-cap companies in the same industry. Investment risk is a key consideration when investing in small cap funds. 

Features of Small Cap Funds

Know the features of Small Cap Funds:

1. Small cap funds tend to have a higher risk-reward profile than other funds, making them more attractive for investors interested in maximizing their return on investment. Small cap funds generally outperform the benchmark index when the market is going upward. 

2. Small cap funds are typically more volatile than other types of funds, which can provide some exciting opportunities for investors who are looking to invest in companies that are in their early stages. Since these companies are at their early stages, it is likely that they may have higher growth potential but also carry a greater risk of loss compared to established, larger companies.

3. Small cap funds generally have a wider range of opportunities than other types of funds, making them a good option for investors who want to explore a variety of industries and companies.

4. Small cap funds typically have a shorter track record than other types of funds, which can allow new investors to get involved without worrying about the fund’s past performance.

5. Investors can redeem their small cap fund units whenever they want. Hence, these funds are liquid. 

6. Investors can invest in small cap mutual funds through lump sum investment or SIP (Systematic investment plan). 

Are Small Cap Mutual Funds Risky

Small cap funds are typically more active than other funds, meaning they are more likely to invest in new companies and take riskier positions. Because of this small cap funds can be risky for investors, but at the same time, they can also be a great way to invest in exciting and innovative companies.

However, mutual funds are not without their risks. They can be volatile and may only sometimes offer the best returns. When the overall market sentiment is negative, small cap companies fall drastically. If you’re looking for an investment that will provide you with a steady return, there may be better choices than a small cap mutual fund.

Who should invest in Small Cap Mutual Funds?

  • You can invest in small cap mutual funds if you are looking for capital appreciation, but it may not be the best option if you’re looking for consistent returns. Small cap mutual funds are often more volatile than larger ones, meaning they may experience greater fluctuations in share prices.
  • Small cap mutual funds are usually riskier than larger ones. This means that they are more likely to experience losses. 
  • Small cap mutual funds typically have smaller management teams and may not have the same resources as large-cap mutual funds. 

These factors make small cap mutual funds a risky investment. However, if you’re willing to accept the risk and wait for a long period of time, they can provide high returns. 

Hence, it is convenient for aggressive investors as they have more ability to take risks. Also, you can consider investing in small cap funds if you are looking to diversify your portfolio across different market capitalization stocks. 

Are small cap mutual funds a good investment?

Small cap mutual funds are some of the best options out there. Small cap mutual funds are so popular that they tend to outperform large-cap mutual funds. This is because small caps are typically more innovative and risky than larger caps, which can result in greater returns.

Another benefit of investing in a small cap mutual fund is that they tend to have a higher percentage of return than other funds. This means that you can expect to earn a higher percentage of return on your investment over time. So if you’re looking for an investment that will provide you with high returns, small cap mutual funds are definitely the way to go.

Tax on small cap mutual funds

The returns earned on small cap mutual funds are subject to the following taxes. 

  1. Short-term capital gains tax: Short-term capital gains tax will be applicable on your investment if you have invested in the small cap funds for 12 months or less. The returns earned on the mutual funds will be taxed at 15%. 
  2. Long-term capital gains tax: Long-term capital gains tax will apply on your investment if you have invested in the small cap funds for over 12 months. The returns on the mutual fund will be taxed at 10%. However, the returns will be taxed only when the total returns are more than Rs. 1 lakh. 

Top Small Cap Mutual Funds

Small cap mutual fund nameReturns NAV (February 01, 2023)Expense ratioExit load
Quant small cap fund direct plan-growth15.75%Rs. 148.960.62%1.0%
Nippon India Small cap 24.39%Rs. 99.640.86%1.0%
Kotak small cap fund direct growth19.38%Rs. 182.390.59%1.0%
Axis small cap fund direct growth23.8%Rs. 70.840.51%1.0%
ICICI Prudential smallcap fund direct plan growth16.56%Rs. 58.110.81%1.0%
SBI small cap fund direct growth25.12%Rs. 123.480.71%1.0%
HSBC small cap fund direct growth20.54%Rs. 51.110.78%1.0%
HDFC small cap fund direct growth18.38%Rs. 87.360.82%1.0%
DSP small cap direct plan growth20.8%Rs. 119.090.94%1.0%
Franklin India smaller companies direct fund growth19.47%Rs. 103.641.04%1.0%

How to Invest in Small Cap Mutual Funds

  1. The first thing you need to do is open a Demat account with Alice Blue.
  2. Once you open an account, hover on the “Products” option and click on “Mutual Funds”. 
  3. Log in to your account and search the list of small cap mutual funds available.
  4. Check the various charges associated with small cap mutual funds, such as expense ratio, exit load, or any other charges. Make sure that they do not have a high expense ratio, as it can reduce your profit. 
  5. Compare various small cap mutual funds by checking their past returns, fund manager’s experience, and expense ratios to make informed decisions. 
  6. Check the minimum investment amount in both SIP and lump sum. 
  7. After you decide on the mutual fund you are willing to invest in. Add money to your Demat account to invest. 
  8. If you are making a lumpsum investment then you will have to have to invest a large sum of money at once. On the contrary, if you are investing through SIP, the chosen SIP amount will be deducted from your bank account at regular intervals. 

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What are Small Cap Funds- Quick Summary

  • Small cap funds are a type of mutual fund that invests in small-cap stocks of companies with smaller market capitalization.
  • Small cap mutual funds aim to generate higher returns by investing in companies with high growth potential and are less followed by analysts.
  • Features of small cap funds include higher risk, higher returns, and volatility in the short term.
  • Small cap funds are considered risky due to the potential for high volatility, lack of liquidity, and limited information available on small-cap stocks.
  • Investors with a higher risk appetite and a long-term investment horizon may consider investing in small cap mutual funds.
  • Small cap mutual funds can be a good investment for investors seeking high growth potential and willing to tolerate higher risk.
  • Tax on small cap mutual funds is similar to tax on equity mutual funds, with long-term capital gains tax exemption after holding the investment for more than one year.
  • Top small cap mutual funds in India include SBI Small Cap Fund, Axis Small Cap Fund, and HDFC Small Cap Fund.
  • Investors can invest in small cap mutual funds through various methods, including online platforms, direct investment with the fund house, and through a financial advisor.

What are Small Cap Funds- Frequently Asked Questions

1. Is a small cap fund safe?

Small cap mutual funds are linked to the equity market, and they invest majorly in small cap  stocks. Hence, they are unsafe for investors who do not want to take risks. 

2. Which fund is better: small cap or mid-cap?

Choosing between small cap and mid-cap mutual funds is determined by an individual’s investment goals and risk appetite. For example, investing in mid-cap mutual funds will be a suitable option if you want to earn average returns. On the other hand, if you want to earn maximum returns, you can invest in small cap mutual funds. However, ensure your chosen mutual funds align with your risk profile and investment objective. 

3. How do I choose a small cap fund?

  • The first and foremost thing you should do is consider your investment objective, risk tolerance, and investment timeline before investing in a small cap fund or any financial instrument. 
  • The next step is to analyze the investment returns you expect from your investment. 
  • Select the small cap fund with a low expense ratio, and check their past returns and the experience of the fund managers managing the mutual fund. 

4. Which small cap fund gives the highest returns?

The list of small cap funds that provide the highest return is: 

  • Edelweiss small cap fund 
  • Canara Robeco small cap fund
  • UTI small cap fund
  • Tata small cap fund
  • SBI small cap fund

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