Personal Finance

All you need to know about Small Cap Mutual Funds3 min read

January 6, 2020
Small Cap Fund

All you need to know about Small Cap Mutual Funds3 min read

Small Cap Funds are open-ended equity funds that invest at least 65% of investors’ money in equity and equity-related instruments of small-cap companies. As per AMFI’s list of stocks, small cap stocks are those which rank from 251st onwards in terms of full market capitalisation. These funds look for stocks of high growth companies that have the potential to transform into tomorrow’s market leaders. 

The value of your investment will grow when the small company will become a relatively large company over a period of time and the prices of the underlying stocks will increase manifold. Small Cap Funds are considered a high-risk high-return opportunity that is meant for aggressive investors who want to stay invested for at least 5 years or more. These funds are ideal for financial goals like long term wealth creation, higher education, planning for retirement and the likes. 

How can I assess Small Cap Funds?

You may evaluate a Small Cap Fund based on your financial goals, risk appetite, and period of investment. Additionally, you may also refer to the following factors to invest in the right Small Cap Fund:

1. Examine the track record of the fund house:

The history of the fund house happens to be an important parameter to assess the reliability of the fund returns. This is because fund houses that have a longer track record are more experienced to handle volatility that happens during market cycles. So, you may shortlist those fund houses that have been in the scene for 5 years or more. This way you would get an idea of the resilience of the fund house to contain downsides during a slump and generate higher returns during a rally.

2. Assess the performance of the mutual fund:

When you assess the fund returns, you get to know whether or not the fund would be able to accumulate sufficient wealth for your specific goals. You may compare the Small Cap Funds on the basis of their capacity to generate risk-adjusted returns. This is reflected in a fund’s Sharpe Ratio. It is a parameter that reveals about the fund’s capability to generate additional returns for the extra risk taken. A relatively higher Sharpe Ratio indicates superior fund performance. Also, remember to pick a fund that has performed well on a consistent basis. 

3. Analyse the expense ratio of the fund:

The expense ratio reflects the cost involved in managing a mutual fund portfolio. A higher expense ratio may cause a substantial reduction in the fund returns. So, it is necessary that you select a fund that is less expensive. Investing in direct plans of Small Cap Funds is a wise way to boost up to 1% higher returns at a relatively lower expense ratio than investing in regular plans.

Best Small Cap Funds

Small Cap Funds are considered to be riskier than mid-cap/large-cap funds. The fund NAV may fluctuate severely during market volatility. Regardless of this, Small Cap Funds can be a good alternative for an aggressive investor to earn superior returns. Enlisted here are the best Small Cap Equity Funds.  

How to Invest in Small Cap Funds via Paytm Money?

Investing in Small Cap Funds is a smart way to park your funds for your long term financial goals. The Paytm Money app and Paytm Money website offer only the top-rated funds for you to pick from. Here are a few steps that you need to follow to invest in Small Cap Funds:

Step 1: Download the Paytm Money app to complete your KYC & become investment-ready within minutes

Step 2:  Select ‘MF Direct’ option. You will land on the Mutual fund dashboard screen. Go to ‘Invest’ tab from the bottom bar.

Step 3: Select ‘Equity tab in the ‘Fund Category’ section. Select ‘Smallcap’ Funds.

Step 4: Tap on ‘Invest Now’ via SIP and enter the amount of investment. Tap on ‘Proceed to Payment’.

Step 5: Make payment using Auto Pay, Netbanking or Debit Card. Tap again on ‘Proceed to Payment’ to complete the transaction.