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Are small cap funds really attractive for long term investment? Key things to know

New Delhi: Mutual funds are largely considered as safer investment options than direct investment into stock markets due to wide diversification of assets and professional fund management. Among the various fund types, retail investors often get tempted by the returns of small-cap funds. Small-cap mutual fund schemes are majorly constituted by small-cap stocks from various sectors and a few debt options such as convertible bonds. 

A person investing in mutual funds with a long-term perspective should stick with the predetermined objective and must refrain from taking the inadequate risk by investing blindly. The variations in the returns and risk involved, shuffling in the portfolio is relatively higher as compared to mid-cap funds and large-cap funds. The investors who have time and capability of tracking the markets and underlying assets in the small-cap fund folio should invest in the small-cap funds.

Small-cap mutual funds investing: Key things to know

  • Small-cap mutual funds contain more risk as compared to mid-cap and large-cap funds due to the involvement of volatile assets. 
  • Investors having substantial exposure in small-cap mutual funds should stay alert with the portfolio rejig and the variations in exit load and other transactional charges. 
  • The decision to invest in small-cap funds should be taken accordingly with the desired objective and within the risk-taking capacity. 
  • Experts suggest that people looking to invest the money for long-term should not allocate more than 15-25 per cent of the monetary resources in the small-cap funds.
  • The investments in a particular small-cap mutual fund scheme should be liquidated within 1 to 2 years if the gains are contained over the investment value.
  • The desired returns from the small-cap funds should be decided before investing in such funds. The return expectancy can be 5-10 per cent higher than the average returns of mid-cap and large-cap schemes.

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