WHAT ARE THE SMALL CAP FUNDS?
Small cap equity funds invest in shares of companies that are ranked 251st onwards in terms of full market capitalisation. In such a scheme, the fund manager must have a minimum exposure of 65% to such companies. The balance 35% can be in mid, large or small cap companies depending on the market view of the fund manager.
HOW MUCH OF YOUR PORTFOLIO SHOULD BE INVESTED IN SMALL CAP FUNDS?
Allocation is usually based on individual risk appetite but in general it is recommending 10-25% of portfolio exposure to small caps. Financial planners recommend Systematic Investment Plan (SIP) in these products which would help investors reduce risks in small cap investing.
WHY INVESTORS CHOOSE THESE FUNDS?
Small cap stocks present an opportunity of high risk & high return. In a bull run, many small cap stocks go up multi-fold. In fact, the manager of small-cap funds has a larger pool of stocks to choose from compared to large and mid-cap stocks as they can pick any stock beyond 251th rank by market capitalisation.
Small-cap investing by itself carries higher risks than investing in large-cap. But, the risks of small-cap investments through mutual funds tend to be lower because fund managers usually diversify portfolio to cut risks.
Small cap index has generated below returns is past few years
| Year | Small Cap Index | Year | Small Cap Index |
| 2012 | 35% | 2017 | 61% |
| 2013 | -10% | 2018 | -23% |
| 2014 | 71% | 2019 | -6% |
| 2015 | 8% | 2020 | 34% |
| 2016 | 3% | 2021 | 64% |
