Understanding Small Cap Funds: A Guide to Equity Investments
Small Cap Funds are a type of mutual fund that primarily invests in small-cap stocks. These funds focus on companies that rank 251st and below in terms of full market capitalization. The primary goal of these funds is to achieve significant capital appreciation by investing in smaller companies that have the potential for substantial growth. Here, we explore the key aspects of Small Cap Funds and highlight some of the leading funds in this category.
What Are Small Cap Funds?
Small Cap Funds are open-ended equity schemes that invest at least 65% of their total assets in small-cap companies. These companies are identified and listed by the Association of Mutual Funds in India (AMFI) based on their market capitalization, and the list is updated every six months. Mutual funds need to rebalance their portfolios within a month following any update to ensure compliance with the latest list.
Key Features of Small Cap Funds
1. Focus on Small Cap Stocks: These funds invest predominantly in small-cap stocks, which are generally defined as companies that are ranked 251st and below in market capitalization.
2. High Growth Potential: Small-cap companies often have significant growth potential. Investing in these companies can result in high returns, especially if the companies grow rapidly.
3. High Risk: Along with the potential for high returns, small-cap funds come with higher risk compared to large-cap and mid-cap funds. This is because smaller companies can be more volatile and less stable.
4. Periodic Rebalancing: The list of small-cap companies is updated every six months based on the latest market data. Mutual funds must adjust their portfolios accordingly to remain compliant with the AMFI guidelines.
Leading Small Cap Funds in India
1. Bandhan Small Cap Fund-Reg(G)
– Assets Under Management (AUM): ₹5,165.54 crore
– Annualized Returns: 42.21% p.a.
– Growth: ▲73.8%
2. ITI Small Cap Fund-Reg(G)
– AUM: ₹2,034.11 crore
– Annualized Returns: 28.39% p.a.
– Growth: ▲70.4%
3. Mahindra Manulife Small Cap Fund-Reg(G)
– AUM: ₹4,131.27 crore
– Annualized Returns: 19.76% p.a.
– Growth: ▲68.1%
4. Quant Small Cap Fund(G)
– AUM: ₹21,242.79 crore
– Annualized Returns: 271.26% p.a.
– Growth: ▲67.1%
5. Franklin India Smaller Cos Fund(G)
– AUM: ₹12,797.29 crore
– Annualized Returns: 182.60% p.a.
– Growth: ▲61.6%
6. Nippon India Small Cap Fund(G)
– AUM: ₹51,566.11 crore
– Annualized Returns: 174.54% p.a.
– Growth: ▲59.4%
7. LIC MF Small Cap Fund(G)
– AUM: ₹237.22 crore
– Annualized Returns: 32.51% p.a.
– Growth: ▲58.7%
8. HSBC Small Cap Fund-Reg(G)
– AUM: ₹14,787.25 crore
– Annualized Returns: 86.30% p.a.
– Growth: ▲57.7%
Why Invest in Small Cap Funds?
1. Diversification: Investing in small-cap funds can diversify an investor’s portfolio, providing exposure to a different segment of the market that may not be captured by large-cap or mid-cap funds.
2. Growth Opportunities: Small-cap companies often have higher growth potential compared to larger, more established companies. This can lead to higher returns over the long term.
3. Professional Management: These funds are managed by professional fund managers who have the expertise and resources to identify promising small-cap companies and manage the associated risks.
Considerations Before Investing
1. Risk Tolerance: Investors should have a high risk tolerance and a long-term investment horizon, as small-cap funds can be highly volatile.
2. Research: It’s essential to research and understand the fund’s performance history, investment strategy, and the expertise of the fund manager.
3. Financial Goals: Ensure that investing in small-cap funds aligns with your overall financial goals and investment strategy.
Small Cap Funds offer an exciting opportunity for investors looking to capitalize on the growth potential of smaller companies. However, due to the higher risks involved, it is crucial to approach these investments with caution and thorough research. Always consult with a financial advisor to ensure that such investments fit within your risk tolerance and financial objectives.
ALSO READ: Unlocking Growth Potential: Exploring Bandhan Small Cap Fund
