Investing in Small Cap Mutual Funds in India:Why small cap is so cheap to buy now?
Investing in mutual funds is a popular way to grow wealth in India, but with hundreds of funds to choose from, it can be challenging to know where to begin. If you are a beginner investor looking to invest in mutual funds, small-cap mutual funds are an excellent place to start. In this blog, we will discuss what small-cap mutual funds are, how they work, and the best small-cap mutual funds available in India.
What are Small-Cap Mutual Funds?
Small-cap mutual funds are equity mutual funds that primarily invest in small-cap companies. Small-cap companies are typically those with a smaller market capitalization, i.e., the total value of their outstanding shares, typically less than $2 billion or $3 billion. Investing in small-cap mutual funds can provide investors with exposure to the potential growth of smaller companies and higher returns in the long run.
How do Small-Cap Mutual Funds Work?
Small-cap mutual funds work like other mutual funds. The fund manager pools money from various investors and invests it in a diversified portfolio of small-cap stocks. The fund’s performance is linked to the performance of the underlying stocks. As with any mutual fund, small-cap mutual funds charge an annual fee, called an expense ratio, for managing the fund.
Benefits of Investing in Small-Cap Mutual Funds:
Investing in small-cap mutual funds has several benefits:
Higher potential returns: Small-cap companies are often overlooked by analysts, so they can be undervalued. Investing in small-cap companies that have a good track record can potentially provide higher returns.
Diversification: Small-cap mutual funds invest in a diversified portfolio of small-cap stocks, reducing the risk of investing in a single company.
Long-term Investment: Small-cap mutual funds are suitable for long-term investment as small-cap companies take time to grow and achieve their potential.
Best Small Cap Mutual Funds in India:
There are many small-cap mutual funds in India. Here are some of the best small-cap mutual funds based on their historical performance, fees, and other factors:
HDFC Small Cap Fund: The HDFC Small Cap Fund has consistently delivered high returns over the years. The fund has an expense ratio of 0.46% and a minimum investment of Rs. 5000.
SBI Small Cap Fund: The SBI Small Cap Fund is another popular small-cap mutual fund in India. The fund has an expense ratio of 0.88% and a minimum investment of Rs. 500.
Nippon India Small Cap Fund: The Nippon India Small Cap Fund has consistently outperformed its benchmark over the years. The fund has an expense ratio of 1.11% and a minimum investment of Rs. 500.
Kotak Small Cap Fund: The Kotak Small Cap Fund is a top-performing small-cap mutual fund in India. The fund has an expense ratio of 0.86% and a minimum investment of Rs. 5000.
Axis Small Cap Fund: The Axis Small Cap Fund has consistently delivered high returns over the years. The fund has an expense ratio of 1.62% and a minimum investment of Rs. 5000.
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Why to Choose Small Cap?
Importance of asset allocation: Small-cap mutual funds are high-risk, high-return investments. Therefore, it is crucial to allocate a small portion of your portfolio to small-cap mutual funds and balance it with other mutual fund categories, such as large-cap, mid-cap, and multi-cap mutual funds.
Impact of economic and market conditions: The performance of small-cap mutual funds is heavily influenced by economic and market conditions. During times of economic growth and market upswings, small-cap mutual funds tend to perform well. On the other hand, during market downturns, small-cap companies are often hit the hardest, resulting in lower returns.
Long-term investment horizon: Small-cap mutual funds require a long-term investment horizon to achieve their potential. Investors should be prepared to stay invested for at least five to ten years to benefit from the growth potential of small-cap companies.
Importance of monitoring your investments: Investors should regularly monitor their small-cap mutual fund investments and review their performance. This can help identify any underperforming funds and take corrective action.
Tax implications: Small-cap mutual funds are subject to capital gains tax in India. If you sell your investments within one year of purchase, short-term capital gains tax is applicable at a rate of 15%. On the other hand, if you sell your investments after one year, long-term capital gains tax is applicable at a rate of 10% on gains above Rs. 1 lakh.
Benefits of systematic investment plan (SIP): Investing in small-cap mutual funds through a systematic investment plan (SIP) can help reduce the impact of market volatility on your investments. SIP allows you to invest a fixed amount regularly at predetermined intervals, such as monthly or quarterly.
Importance of reading the fund’s offer document: Investors should read the fund’s offer document carefully before investing in small-cap mutual funds. The offer document contains essential information about the fund’s investment objective, asset allocation, fees, and other disclosures.
Conclusion:
Investing in small-cap mutual funds can be an excellent way to potentially earn higher returns in the long run. However, it is essential to carefully research and choose the best small-cap mutual funds based on your investment goals, risk tolerance, and investment horizon. Investors should also allocate their portfolio wisely, regularly monitor their investments, and consider the tax implications of their investments. Lastly, it is essential to read the fund’s offer document carefully before investing in small-cap mutual funds. By following these best practices, investors can make informed investment decisions and achieve their financial goals.
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