What are Small-Cap Mutual Funds?

What are Small-Cap Mutual Funds?

Small-cap Mutual Funds are a category of mutual funds that primarily invest in stocks of small companies with small market capitalisation. These companies are relatively smaller in market capitalisation, as compared to Large-cap and Mid-cap companies. According to SEBI, a small-cap fund is required to invest 80% of the total assets in small-cap companies. Small-cap funds have gathered the eyes of investors for the last 8-10 years. In some cases, they have given tremendous returns in the long run, and they have even outperformed large-cap funds and mid-cap funds. However, the higher the return higher the risk....

Features of Small-Cap Mutual Funds

1. High Investment in Small-cap Companies: As per the SEBI guidelines, small-cap funds have to invest 80% of the total assets in small-cap companies, and they can use the rest composition to invest in large-cap, mid-cap, or any other asset class....

Benefits of Small-Cap Mutual Funds

1. Diversification: As the quantum of available small-cap companies is high and the fund is invested in different companies of different sectors like Financing, IT sectors, Hospitality, FMCG, banking, etc. This makes the portfolio diverse and allows better correlation for investors....

Taxation rules for Small-Cap Mutual Funds

It is important to grasp the taxation implication of any investment in order to substantiate whether taxation implications are in line with your desired portfolio strategy, otherwise, the fruit of investment won’t be sweet. So, in mutual funds, the taxation rules depend upon two factors, 1.  type of mutual funds and 2. the holding period of the respective mutual fund. As small cap mutual funds are equity oriented, they have the following tax implications:...

Conclusion

There are a lot of opinions going around the market, some say investing in small cap funds is risky and some say not investing in small cap funds is risky, investor has to balance his/her priorities along with his/her investing objective. Small cap funds have proved to give higher returns, but they have a big risk factor associated with them. If an investor has the risk-bearing ability, then he may deploy a significant value of his/her investment in small-cap mutual funds, if he is not aggressive, then he may deploy a smaller amount of his/her investment value in small-cap mutual funds....