Investing in mutual funds has become popular, offering diverse options catering to varied investor preferences and risk appetites. Small-cap mutual funds are one category that often garners attention due to their potential for high returns. However, investing in small-cap funds also comes with risks that you should be aware of.
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What’s a small-cap company?
A small-cap company has a market capitalization of less than 5,000 crores. Hundreds of such companies listed in the stock market are apparently doing well compared to their peers. Fund managers choose to invest in these companies after extensive research and considering all the probabilities since these companies have solid growth potential, delivering fantastic returns if managed correctly.
Let’s identify if it is still the right time to jump in.
Growth Potential
Small-cap companies are usually young and have significant scope for growth ahead of them. Investing in these companies early on can yield substantial returns if they perform well and gain market share.
Market Conditions
Assess the current market conditions, geo-political issues, and other factors that can significantly impact the stock market, which could determine your returns in the small-cap investment.
Time Horizon
Small-cap funds generally deliver fantastic returns over a more extended period. There are chances of short-term volatility, which could negate returns and turn your investments against you.
Risk
Investments in small-cap companies are generally considered riskier than the mid-cap or large-cap as they are more volatile and can fluctuate drastically on either side, which can deliver exponential returns or turn your investments into peanuts.
Do thorough research
Since small-cap funds are more volatile than large-cap funds, you must thoroughly research the fund you’re willing to invest in. It would help if you considered metrics such as performance over the years, dependability on the fund manager, the investment strategy, etc.
Remember, there’s no perfect investment strategy as such. All the investments are risky. Please seek professional advice to understand if small-cap funds are for you.
