Best Small Cap Mutual Funds to Invest in 2024
What are Small Cap Mutual Funds?
Small cap mutual funds are investment funds that buy shares of small companies. These companies have a market capitalisation of less than Rs. 5000 crores and are not usually among the top 250 small cap funds. Although small companies can grow rapidly and offer high rewards, they are extremely volatile and have a lot more risk.
Reasons to Invest in Small Cap Funds
- These companies have a good scope for growth and expansion. Investing in early stages could lead to higher returns.
- They provide a way to diversify your portfolio and include some smaller companies as well.
- Over time, growth of small companies can result in substantial capital gains, ideally suited for long term investors.
Which are Small Cap Funds Best Suited for?
Investors with a Longer Time Horizon
Small Cap Mutual Funds exhibit short term volatility and require a long term perspective. So, if you can weather short term fluctuations and hold your investment for a number of years, small cap funds are for you. Over extended periods, these funds have the ability to provide substantial returns.
Investors with High Risk Tolerance
Small Cap Funds focus on small, rapidly expanding businesses which provide significant potential returns. But along with it comes, considerable risk. Compared to large cap or mid cap investments, small cap mutual funds are a lot more volatile and risky. So, investors who are willing to accept this higher risk in exchange of the high returns are best suited for these funds.
Best Small Cap Mutual Funds in India
Quant Small Cap Fund
Investment Objective: The scheme’s main investment goal is to achieve capital appreciation and offer long-term growth prospects through investments in a range of Small Cap companies. Please note that there is no guarantee that the scheme’s investment objective will be achieved.
Return/Risk: The fund is underperforming compared to its category.
Volatility Protection: This fund ranks lower in terms of protecting against volatility within its category.
Return Consistency: This fund stands out for its ability to consistently generate returns within its category.
Return Outperformance: This fund has produced the highest return among Small Cap funds over the past 10 years.
Chance: This fund has produced a 7.45% annual return 70% of the time for investors who hold it for at least five years.
Exit Load: A 1% exit fee applies if redeemed within one year.
DSP Small Cap
Investment Objective: The main goal is to achieve long-term capital growth by investing predominantly in small-cap company equity and related securities. Occasionally, the fund manager may also explore other equity investments to ensure an optimal portfolio mix. Please note that there is no guarantee that the Scheme’s investment objective will be met.
Return Consistency: This fund ranks lower within its category when it comes to producing a consistent return.
Return Outperformance: This fund has yielded the highest returns among Small Cap funds over the past decade.
Return/Risk: The fund is underperforming compared to others in its category.
Chance: This fund has delivered a 12.38% annual return in 70% of cases for investors who hold it for at least five years.
Exit Load: There is a 1% exit load for redemptions made within 12 months.
Kotak Small Cap
Investment Objective: The scheme seeks to generate capital appreciation from a diversified portfolio of equity and equity related securities by investing predominantly in small cap companies.
Volatility Protection: This fund stands out as one of the top choices for safeguarding against volatility within its category.
Return Outperformance: This fund has achieved the highest returns among Small Cap funds over the past decade.
Chance: This fund has delivered a 16.75% annual return in 70% of cases for investors who hold it for at least five years.
Return/Risk: This fund generates returns that are 20% higher for every unit of risk it undertakes.
Exit Load: A 1% charge will apply for redemptions made within 365 days for units exceeding 10% of the investment.
Understand the Working of a Small Cap Fund
Small Cap Mutual Funds invest a major portion, at least 64%, of their assets in small cap company stocks. These companies include the ones with a market capitalisation below the top 250 companies. Small cap companies are preferred by investors who want positive returns and are willing to take risks for the same.
Although a skilled fund manager would carefully select the stocks, focusing on lesser known businesses with the potential to grow substantially. It is still advisable for investors to allocate a small part of their portfolio to small cap mutual funds due to their highly volatile nature.
Choosing a Platform
In order to invest in small cap mutual funds, you need to decide on a platform from the following available options:
- Investing directly from Association of Mutual Funds in India (AMFI).
- Investing through an Asset Management Company’s website.
- Investing with the help of a fund registrar and transfer agent.
- Investing using brokerage firms such as Zerodha, Groww, Upstox, Angel one, etc.
Frequently Asked Questions
Small cap mutual funds investors should plan for a longer timeframe, around 5 – 7 years. This provides enough time to smooth out volatility and generate potential returns
It is indeed possible, since a number of small cap mutual funds provide investment options through Systematic Investment Plan (SIP).
Reviewing your investments annually is a good practice. Apart from that keep a check of changes in market conditions and your personal financial situations. This ensures that your investments are in line with your objectives.
Consulting a financial advisor before making a financial decision is a good idea, it will ensure that your chosen stock aligns with your investment strategy and risk profile, setting you up for potential gains.