Small-Cap Mutual Funds
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Small-Cap Funds- Overview
The small-cap fund is a type of equity mutual funds that invest in start-ups or companies in the method of development that have a market capitalization of less than Rs 500 crore. Small-cap usually means companies with small market capitalization or market cap. The size of the company is a necessary measure when picking equity portfolios. This is because, based on the size of the company, the portfolio will have its own set of plans risks, and chances.
Mutual Fund investments in terms of small-cap funds mainly in stocks of small companies that have the potential for growth. This stock can improve or develop in a short time. But this also means that the return from these funds is shown to great volatility.
The objective of equity strategy will be to predominantly create a portfolio of small-cap companies which have:
- Constant Increase prospects
- Measure financial strength
- Sustainable business models
- The acceptable cost that provides the potential for capital recognition.
Market Capitalization = Number of Outstanding Shares x Stock Price per Share.
As per the circular circulated by the Securities Exchange Board of India (SEBI), to be named as a small-cap company the following criteria will have to be met.
- Rank 251 and below in terms of total market capitalization
- Keeping at least 65% of assets in small-cap equity and equity instruments
- Market Cap within Rs. 10 Crore -Rs. 100 crore
Eligibility for Small-Cap mutual funds
The size of the company heavily affects the returns it can create over some time. Companies with different market capitalizations come with a different set of opportunities. Small-Cap companies come with great risk and huge reward possibilities. You will have to take huge risks by investing in smaller companies that are yet to prove their business on a large scale.
As a reward, if the company does great and succeeds, you will get returns far better than any other investment tool. Small-cap mutual funds are fit for investors with high-risk appetite and a long-term investment horizon. If you open to relatively higher risks, you should invest a part of your portfolio in some of the best small-cap mutual funds. It is necessary to ensure that only a part of your entire portfolio is in small-cap funds.
Procedure to invest in Small Cap Mutual Funds
Sign in or log in to the account complete details Name, E-mail ID, Contact Number, and Password.
It will ask for PAN Number to enter it and Fill up details Basic, Bank, Personal, and Address Details. Documents Upload for KYC is for the people who don’t have KYC, after that it will ask for a 5-second video upload.
Digital Signature Upload
The person needs a DSC (Digital Signature Certificate) for uploading on-page to proceed with the mutual fund investment procedure.
Start Investing Now
The page for investing will be open and you can pick the fund you want to invest in along with the payments process i.e. only Net banking.
How to Invest in Small-Cap Funds?
The following are the major factors you require to look at before investing in a small-cap fund:
An investor should do a fair assessment of the funds’ performances for over some time. Also, it is suggested to go for a fund that consistently beats its benchmark over 4-5 years, additionally, one should see each period and see if the fund can beat the benchmark or not.
It is necessary to check the portfolio construction of the scheme that you will be investing in. Since, small-cap is a risky fund, the portfolio of the scheme must have a little portion given to large-caps and also to money market instruments so that it produces regular income.
A fund manager plays an important role in the overall performance of the scheme. A fund manager is responsible for making investment decisions for the fund’s portfolio. So, investors before investing in small-caps must ideally check the past performance of the fund managed by that particular fund manager, mainly in the tough market phase.
While choosing the small-cap funds to invest, always look at the quality & reputation of the fund house. A fund house with a long-standing record, large Assets under Management (AUM), star funds or good performing fund, etc., is the one to invest in. A fund house should have a strong presence in the industry along with a consistent mark record.
Small-cap funds bring a chance to provide higher returns compared to other funds. While the volatility is relatively higher, small-cap companies are perfect for investors giving long-term wealth creation. By investing in some of the best small-cap funds in India, you can avoid companies with bad financials as the mutual fund houses carry out thorough research before investing. Not all mutual fund companies invest in small-cap companies giving rise to a large opportunity for those who do. The growth potential for small-cap companies cannot be linked with that of large-cap or mid-cap companies. Since these companies have a market cap that is shorter than Rs 500 crores.
- The companies that small-cap mutual funds invest in have a high potential for growth in the long-run.
- Small-cap funds are the volatile reason is small-cap companies are not financially stable. They are also not as built as larger firms.
- Small-cap funds are risky. They can produce fantastic returns for investors seeing for aggressive growth and who hold high risk-taking capacities.
- Small-cap funds are better than mid- and large-cap mutual funds during a bull market. A bull market is when share prices increase, which promotes buying.
- A small-cap fund has exponential expansion capacity.
- They give high returns on investment if the right stocks are picked from a small-cap section.
- Small-cap stocks give a big room for diversification in the fund’s portfolio.
- Will set a large value on the fundamental strengths of the company and the underlying business.
- They are underfollowed in the stock market and normally untapped by institutional investors, giving a great opportunity to smart investors to increase their investment immediately.
- One can take steps to ensure that investors can maximize wealth from their small-cap schemes.
- They can invest in them with a higher investment range of a point of 7- 10 years.
- An aggressive investor with a capacity to take a huge risk and withstand great volatility. They must view investing in small-cap schemes with a greater investment horizon.
- With a long-term investment horizon looking to tap into possibilities given by a small-cap.
- The idea to gain the opportunities given by small-cap space.
The small-cap funds to benefit from tax breaks for small firms. Smaller companies are continuing to benefit from the corporate tax cut introduced in the budget.
The tax break is working to enhance the PAT (Profit after Tax) of small companies. There is a chance that when the profits of these small companies go up, the stock prices might go up.
If one needs to benefit from the tax, they should choose a mutual fund scheme that finances in smaller companies with or under Rs 50 crore turnover.
The reduction in tax rate is limited to companies with a turnover of Rs 50 crore. There would be very fewer companies that would certainly fit for being in the investment because of the small size.
The way to reduce risk when investing in small-cap mutual funds
- Spend time examining small-cap funds. Funds with a certified record of up to 5 years are great.
- Expand the portfolio so that losses are minimum when the markets are below. A good mix of investments will serve as a shield upon a huge loss. One may also get great returns in different areas of investment when small-cap mutual funds fail to fulfill profits.
- Avoid attempting to time the market, as it is risky and unstable.
- Divining the market is very tough. If one goes wrong in their predictions, it could head to losses.
- Invest in small-cap mutual funds through the best SIP plans. It will average out the price, hence decreasing volatility.
How to select the best Small Cap mutual fund for investment?
The small-cap mutual fund has shown tremendous growth in 2019. Funds that have invested in good quality stocks exposing good business fundamentals are showing good returns. Top Small-Cap mutual funds are showing returns and have become attractive for investors once again.
1. Check their past performance:
While the past performance of a fund is no indicator of the future growth potential, it can talk volumes about the stocks that hold the portfolio. If the mutual fund has not fared badly in a bearish market, it is proof of the quality of stocks in its portfolio. Examine the past performance upon the growth of the broader Small Cap indices to make a decision.
2. Check their expense ratio:
The expense ratio is the ratio of total expenses acquired by the mutual fund upon the total assets of the fund. A huge expense ratio means a higher portion of the assets are being used to fund administrative and selling expenses. This does not translate into a greater return for the investors. The best Small Cap mutual funds do not have a great expense ratio. The expense ratio ends as per SEBI depend on the assets under management (AUM):
• 2.25% – AUM of Rs. 500 -Rs. 750 crores
• 2% – AUM of Rs. 750 -Rs. 2,000 crores
• 1.75% – AUM of Rs. 2,000 -Rs. 5,000 crores
• 1.5% – AUM of Rs. 5,000 – Rs. 10,000 crores
• A 0.05% decrease for every Rs. 5,000 crore rise in AUM
• 1.05% – AUM over Rs. 50,000 crores
Examining the expense ratio upon the ceiling is a great way of seeing the right mutual funds.
3. Look into their sectoral allocation of funds:
Checking which sectors the mutual funds invest in can be important in selecting where to invest funds. If the mutual fund is investing funds in deeply risky sectors that are going by confusion, then that will not turn into good results for the fund and consequently, your investment.
4. Entry or exit loads:
Entry loads decrease the amount invested whereas exit loads decrease the net return on your investment. It is necessary to select a fund that has no exit load or one that has a low exit load so as to gain the highest returns on your investment.
Small-cap mutual funds invest in equity and equity-related instrument of companies with a market capitalization of fewer than 500 crores. If you hold your funds for over 12 months, you will be responsible to pay long-term capital gain tax which is 10% of your gains. However, this is applicable only if the returns are more than Rs 1 lakh.
On the other hand, if you sell small-cap mutual funds before 12 months from the date of purchase, a short-term capital gain tax of 15 % will be imposed on your returns. So, selling your funds before a year will warrant a greater tax upon holding the funds for over a year. It is highly suggested that you do not trade your investment in short-term market movements. You will not only pay more taxes, but you will also miss the chance to get bigger revenues.
6) Measuring Fund’s Risk:
The risk in mutual funds investment essentially leads to the possibility of returns being different from what you first expected. In other words, risk means the volatility of returns. But these risks are not constant during all mutual fund schemes. The return and risk relationship changes based on a kind of factor. There are few risk measures generally used to assess mutual funds such as alpha, beta, r-squared and standard deviation. They help in assessing the risk connected with different schemes.
- Alpha: Alpha is used to find out the excess return on investment over and above the benchmark. If the alpha is 0 then our current investment is similar to the benchmark. If alpha is 1 then the fund has outperformed & less than 0 then the fund has underperformed.
- Beta: Beta measures a fund’s volatility in connection with the market. The volatility of the market is 1 by rule. For mutual funds, their benchmark is considered to be the market. A beta higher than 1 says the fund is more volatile than the market whereas beta less than 1 means it is less volatile than the market.
- R-squared: R-squared tells how similar a fund’s performance is to its benchmark’s or how much of the performance comes solely from movements in its benchmark. R-squared values range from 0 to 1 and are commonly stated as percentages from 0 to 100%
- Standard deviation: Standard deviation of a fund, expressed as a percentage, defines how much a fund’s return has varied from its average return. If a fund has a higher standard deviation its returns are expected to be much more volatile.
7) Risk-adjusted returns
Returns should be risk-adjusted as small-cap funds carry risk but there are some funds that can manage risk better than their peers. Ratios such as Sharp ratio, Sortino ratio, Information ratio, etc. are used to identify funds with the potential of generating good returns and low volatility.
8) The expertise of the Fund Manager
The expertise and skill set with which a fund manager manages a fund has a huge impact on its performance and the portfolio over time. You should look for a fund manager with a strong track record across market ups and downs and his investment experience.
With the market fluctuations, the valuations and the margin of safety keep changing. The ratings on RankMF can help you evaluate the quality of the portfolio holdings and assist you to know which fund is the right one to invest in.
Best Small Cap Mutual Funds in India
|Fund Name||3- Year Returns||5- year Returns|
|SBI Small Cap Fund||16.19%||27.91%|
|Reliance Small Cap Fund||16.2%||25%|
|HDFC Small Cap Fund||19.78%||19.33%|
|Aditya Birla Sun Life Small Cap Fund||10.47%||17.94%|
|Kotak Small Cap Fund||10.8%||19.11%|
|DSP Mid Cap Fund||15.28%||20.51%|
Frequently Asked Questions
2. After login into the website. Go to Start Investing ( at the right side )there is an option for Small-cap mutual funds. Click on that.
3. The page will display in the rightmost side “get you to account“. Enter all the details asked. and click on “invest now”.
4. Then create an account and password. Plus, get your KYC done in 5 minutes by mentioning the PAN number.
5. Invest in chosen Small-cap mutual funds at Wealthbucket amongst hand-picked mutual funds.
1. SBI Small Cap Fund
2. Reliance Small Cap Fund
3. HDFC Small Cap Fund
4. Aditya Birla Sunlife Small Cap Fund