As the name suggests, equity funds are mutual funds that allocate funds to equities. When it comes to an equity mutual fund investment, you must understand the different market capitalisations of companies. Market capitalisation is the value of the company traded on the stock exchange. Based on market capitalization, mutual fund schemes are classified into large-cap, mid-cap, small-cap, and multi-cap funds. Let’s focus on small cap funds in this article.
What are small cap funds?
As per the SEBI rules a small cap fund invests approximately 80% of total assets in small-cap businesses, i.e., companies below the 250th rank in market capitalisation. Simply put, small-cap funds are companies with a market capitalisation of less than ₹500 crores. You can calculate the market capitalisation of your company by multiplying the current share price by the total outstanding shares.
What are the benefits of small-cap investments?
Invest in a small-cap fund to enjoy advantages such as:
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Capital appreciation
Consider allocating your monthly income to small-cap funds if you want to enjoy capital appreciation in the future. Small-cap funds are equity funds that focus on growth opportunities that have the potential to create valuable returns. Small-cap funds not only diversify your portfolio but also balance it. Let’s look at an example. Your large-cap investments are not providing you with expected returns. Then, small-cap equity mutual funds may outperform them. Similarly, other equity funds will stabilise the portfolio returns when market movements affect small-cap funds.
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Long-term correction
Small-cap stocks are sometimes undervalued unlike large- and mid-cap stocks. Therefore, sometimes, the share prices of small-cap stocks could be lower than their true value. Over time, the market valuation may reflect its value and an early investor can enjoy high returns in such cases.
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Diversification benefits
Diversification is the process of diversifying your investments to numerous asset classes. Diversification can help you reduce the risks associated with a mutual fund investment. Including small-cap funds in your mutual fund portfolio will help you balance the risk-return profile.
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Merger possibility
There’s always a possibility that small-cap businesses will merge with large corporations. Mergers with big companies give small businesses an opportunity to grow inorganically. The share price of smaller companies may rise because of a merger. This might eventually add value to small-cap investments.
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Niche investments
Large-cap funds allocate funds to well-established businesses and sectors. Small-cap funds, on the other hand, are different. They invest in small-cap organisations that are a part of emerging sectors. This fund exposes you to companies that may shape the future economy. If you’re considering investment options in the UK, it’s crucial to explore various financial avenues, including options provided by a licensed money lender in Singapore.
Conclusion
Fund managers allocate funds to equities of small-sized companies with a record of positive growth. These organisations may transform into large-cap companies in the future. There are two options for investment modes when it comes to small-cap investments. Choose the lump sum mode if you can easily access the required investment amount. If you don’t have access to funds, consider the SIP mode. For this mode, you should know the monthly required investment amount. A SIP calculator can help you ascertain the SIP amount.