Best Small-Cap Mutual Funds - Benefits, How does it Work & Who Should Invest

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Small-Cap Mutual Funds primarily focus on smaller companies, those beyond the top 250 in terms of market capitalisation. Smaller companies in the stock market can be like hidden treasures ready to grow big. They might not be as famous as big companies, but they can be great investment choices for people willing to take a chance.

Many Indian investors seek good returns by investing in Small-Cap Mutual Funds, which have a track record of providing substantial gains and occasionally surpassing their larger equivalents. However, it's important to know that small-cap funds can be unpredictable and go up and down frequently.

Despite these, you can invest in Small-Cap funds is a good idea. They allow you to spread out your money across a wide range of Small-Cap stocks. But there are plenty of Small-Cap mutual funds in the market, which can make it difficult to choose the right one. Thus, today, we will review the best Small-Cap Mutual Funds for investing in India, but before that, let us understand their advantages, their working and suitability for investing in Small-Cap funds.

Advantages of Small-Cap Funds

Small-Cap funds offer several advantages. Some of them are:

1. Early Investment Opportunities

When you invest in Small-Cap Mutual Funds, you're like an early supporter of smaller companies that might become big. This might reap you more than decent returns.

2. High Risk, High Reward

While these investments carry a higher risk level due to the companies’ lack of factors available with Large-Cap companies, they can offer substantial returns for those willing to take on this risk.

3. Long-Term Investment Strategy

Small-Cap Mutual Funds are ideally suited for aggressive investors looking at an investment horizon of 7 years or more. This long-term approach can yield significant benefits as these smaller companies grow and mature.

Features of Small-Cap Funds

Small-Cap funds offer various notable features. Some of them are:

1. SEBI Mandate

As per SEBI guidelines, the best Small-Cap fund must allocate over 65% of the fund corpus to small-cap stocks.

2. High Growth Potential

These funds can yield high returns due to the significant growth potential of the best Small-Cap fund companies.

3. High Risk

Despite the potential for high returns, Small-Cap funds carry substantial risk. These companies often lack the financial resilience to withstand harsh market conditions, leading to high volatility.

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Top Small-Cap Mutual Funds for Investment in India

There are several best Small-Cap mutual funds. Some of the top types of Small-Cap mutual funds are as follows:

Scheme Name	Fund Size	Annualised Returns (5 Years)	Overview
ICICI Prudential Smallcap Fund	₹6,054 Crs	30.79%	ICICI Prudential Smallcap Asset is a common asset accessible through ICICI Prudential Mutual fund. A little cap reserve puts essentially in little cap values, with something like 65% of its total assets invested into smallcap stock.
HDFC Small-Cap Fund	₹22,560 Crs	30.87	HDFC Small-Cap Fund is a mutual fund available via HDFC Mutual Fund. A small-cap invests fundamentally in small-cap values, with no less than 65% of its assets invested in small-cap stocks.
Kotak Small-Cap Fund	₹12,286 Crs	29.74%	Kotak Small-Cap Fund is a Kotak Mahindra Mutual Fund mutual fund. It is a small-cap fund that invests primarily in small-cap equities, with at least 65% of its total assets invested in small-cap stock.

Small-Cap Funds Returns Calculator

A Small-Cap Funds Returns Calculator is a financial tool used to estimate the potential returns on investments in small-cap mutual funds. This calculator allows investors to input variables such as the initial investment amount, expected annual contribution, tenure, and the rate of return. It then computes an approximation of the future value of the investment, helping you gauge how your investments in small-cap funds may grow over time. It's a valuable tool for investors to plan for their financial goals and assess the potential outcomes of their investment strategies.

To calculate returns on a smallcap fund manually, you can use the formula for compound interest:

A = P(1 + r/n)^n * t

Where,

P denotes the initial principal balance

r denotes the annual interest rate

n denotes the number of times that interest is compounded per year, and

t denotes the tenure.

In any case, it's essential to note that past presentation doesn't ensure future outcomes. It gives bits of knowledge to an asset's investors in assessing its track record and risk-return profile.

How do Small-Cap Funds Work?

Small-Cap funds are mutual funds that primarily invest in Small-Cap stocks or companies with a market capitalisation ranking beyond the top 250 in India. Per the Securities and Exchange Board of India (SEBI) guidelines, The fund manager should distribute at least 65% of their assets for investments in small-cap stocks.

These ventures present a chance for financial backers to accomplish great returns driven by the critical development capability of small-cap organisations. However, it's important to note that they also come with higher risk and volatility levels than large or medium-cap funds.

Smaller businesses often lack the financial resilience to withstand adverse economic conditions, leading to substantial price fluctuations. Therefore, Small-Cap funds are most suitable for individuals with a high risk tolerance and are committed to a long-term investment strategy.

Who Should Invest in Small-Cap Funds?

Investing in small-cap mutual funds is a good decision, but you must first understand who can invest in them. The people who can invest are:

1. Long-Term Investors

Small-Cap funds are ideal for investors seeking long-term capital growth. Given their volatility in the short term, these funds are best suited for those planning to invest for 7 years or longer. Over such extended periods, Small-Cap Funds can deliver substantial returns.

However, even for long-term investments, it’s advisable to maintain limited exposure to these funds due to their potential high volatility.

2. High-Risk Takers

Investors with a high-risk appetite may find Small-Cap funds appealing. These funds invest primarily in small listed companies with high growth potential, offering unmatched return prospects. However, this high exposure also carries significant risks as market fluctuations can significantly affect these companies' performance.

Therefore, due to this high risk-high return characteristic, Small-Cap funds are suitable only for investors willing to take on substantial risk.

Conclusion

Investing in small-cap mutual funds in India can offer exciting growth opportunities but comes with higher risks. But before investing in them, ensure you understand your financial goals and risk tolerance and have a diversified portfolio. You must remember while small-cap funds have the potential for significant returns, they require a long-term perspective and patience.