Important reasons to invest in small-cap funds

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When most people think of investing in mutual funds, they generally picture large, publicly traded companies. However, small-cap funds can also be a wise investment.

Small-cap mutual funds are funds that invest in smaller companies with a market capitalization of Rs 5,000 crore or less. These companies tend to be younger and faster growing than their large-cap counterparts, making them more volatile but also offering the potential for lucrative returns. On that note, here are the four most important reasons why you, as a smart investor, should have a small-cap fund in your portfolio.

  • Small companies can turn big in their sectors

The first reason to invest in small-cap funds is that small companies can turn big over time. It is evident that some of the top tech companies in the world today got their start as startups but grew into billion-dollar businesses through persistence and hard work.

Also, small-cap funds choose promising emerging companies with the potential to scale up rapidly in their respective sectors. As a result, some small companies may have the potential to turn into mid-cap or large-cap companies over time. This way, investing in small-cap funds can give you the opportunity to become a part of a successful company at an early stage.

  • Offer exposure to different sectors

Small-cap funds can give you exposure to different emerging sectors. For example, such industries may be involved in the niche sectors of larger industries like textiles, sugar, chemicals, construction, and more. This type of exposure can be beneficial because it allows you to diversify your mutual fund investment portfolio and reduce your overall risk.

  • You can get quality funds at a discounted rate

Many small-cap funds are quite underrated and underpriced because not many investors are aware of these companies and their businesses. Investors can use this opportunity to identify funds that are undervalued. With adequate research, investors can buy these funds at discounted rates and potentially make a profit in the future.

  • Offers decent returns over the long term

Small-cap funds can be a volatile and risky investment since these funds invest most of their investible corpus in equity and equity-related instruments of small-cap companies. However, these funds can show extreme growth potential over time. So, if you have some risk appetite for the chance of a higher return, investing in the best small-cap mutual funds could be a good option.

Just be sure to have a long-term investment horizon of at least seven to ten years so that market volatility has a chance to stabilise and offer the expected returns. You can also choose to invest in small-cap funds through Systematic Investment Plans (SIPs) and make regular contributions to mitigate market instability over time and take benefit of rupee cost averaging.

To conclude

Many people think that small-cap mutual funds are risky investors. However, with exponential growth potential and exposure to different emerging sectors as its key features, small-cap funds can be a great way to grow your portfolio and generate optimum returns over the long term.

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