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Are small-cap Mutual Funds good Investment?

Securities Exchange Board of India categorises companies in terms of market capitalization. The ones that are not in top 250 are termed as small-cap and the ones ranked from 101 to 250 are termed as mid-cap.
If you are someone who has an appetite for risk and are looking for higher returns, then you may add small-cap funds to your portfolio.
Below are the pros and cons of small-cap Mutual Funds:
Pros:
Good Returns: The star stocks of the future are often to be found among the small-cap. Small-cap are typically those whose potential has not yet been fully discounted by the market. A good small-cap Mutual Funds focuses on discovering stocks that offer hidden value.
Diversification: The small-cap universe is a large one and offers a huge diversity of choice for picking stocks across sectors and industries. Mutual Funds managers can identify and pick niche companies that could be potential multi-baggers.
Cons:
Risk: Small-cap are highly volatile and swing much more than mid-cap and large caps when markets are unpredictable. Many of them are illiquid and as a result may not offer good exits in falling markets. Therefore small-cap Mutual Funds may be suited only for investors with good risk appetite.
Fund-Dependent: Picking good small-cap requires a lot of research and analysis. Not all Mutual Funds managers may be able to do this successfully. So the success of a small-cap fund rests heavily on the capabilities of its fund manager and his/her team.
Now that you know the advantages of investing in mid-cap you may decide if you want to invest in it or not. If you plan to start investing in Mutual Funds I would recommend HDFC securities. Here is the link for the same: https://www.hdfcsec.com/digify/login?id=lgn

Comments

  • Potential of smallcap stocks, any serious investor is often looking at potential candidates in this space. However, given the high potential of manipulation in prices , and lack of adequately certain audits of financials, it is important that one look at companies which have qualified the lenses of sophisticated investors especially mutual funds, FIIs etc. Though this itself also at times may not be a guarantee of prospects, at least the universe is restricted to a few stocks which one may then subject to further scrutiny or research.Choosing the right fund is more crucial than picking the best performing funds. One needs to look at quantitative, as well as, qualitative factors when short-listing mutual funds. The quantitative aspect should cover how the fund has performed on a risk-adjusted basis (Sharpe Ratio is a good indicator) over multiple timeframes, spanning from 1-3 years, and if it has generated an above-average alpha versus the benchmark over the periods. Apart from this, one needs to look at the fund house and fund manager pedigree before zeroing on the right fund.

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