What Is Small Cap ?
The term small cap describes companies with a comparatively smaller market capitalization. The market value of the outstanding shares of the company gives its market capitalization. The definition of small-cap companies keeps varying with respect to the market capitalization.
What are Small-cap Funds ?
These funds are equity mutual funds which invest at least 65% of their assets in equity-related and equity investments of small-cap companies. According to the SEBI Guidelines and Regulations, small-cap firms are those which are ranked below the top 250th companies in terms of their market capitalization.
How Does Small Cap Funds Work ?
The “cap” in small-cap refers to a company’s capitalization as determined by the total market value of its outstanding shares. Small-cap stocks are often defined as the stock of publicly traded companies that have a market cap of less than Rs 5,000 Crs. Logically speaking, as underlying firms are young and seek to expand aggressively, they are more vulnerable and volatile to losses during downtime in the stock market. In a small-cap fund, the fund manager may have exposure to stocks of small companies in the range of 65% to 90%.
Small-cap stocks give individual investors an edge when compared to institutional investors as the latter prefer to purchases large-cap stocks due to their relatively stable returns, while investors hoping for aggressive returns will invest in these funds.
Moreover, fund composition plays a significant role, and an impulsive decision will endanger one’s returns. It makes sense to invest in multiple funds & have a diversified portfolio, so as to generate good returns along with lower volatility & risks.
WHO SHOULD INVEST IN SMALL CAP FUNDS ?
- An investor having a vision of benefitting from the higher growth potential and scope of small-cap firms.
- Those who are indifferent to short-term volatility and can patiently stay invested with a time horizon of at least 7 years.
- Long-term investors who are mature enough to have experienced market volatility and having a slightly higher risk appetite.
- To drive maximum returns and benefits from small-cap companies, one should stay invested in them for at least 7 yrs in an entire economic cycle.
WHY SMALL CAP FUNDS ?
- They often offer a better growth prospect due to the presence of emerging/new segments in the portfolio that are growing at a faster pace.
- They also offer a broader universe for investment when compared to mid-cap, larger-cap, or thematic/sector funds. The smallcap universe includes all listed stocks which ranks below the top 250 companies in terms of market capitalization.
- Small-cap firms also possess a greater potential when it comes to gaining market share as they have new technology or products/services.
- They tend to grow faster during economic recoveries than mid and large-caps.
- Lack of price discovery and awareness of small-cap firms among market players gives them better growth potential.
- More than macro-economic factors, the company-specific factors impact the returns of small-cap stocks.
- This space is a relatively inefficient market with under-researched and under-owned companies.
Must Read: Best Small Cap Funds to Invest in India
If one holds the units of small-cap mutual fund for a tenure of more than 12 months, he/she will be liable to pay LTCG tax at the rate of 10% on the gains. However, this is levied only if the returns exceed Rs. 1,00,000 in a financial year.
On the other side, if one redeems the fund before 12 months from the date of investment, the STCG tax of 15% is applicable on the gains. So, redeeming the funds before a year will result in higher tax against being invested for over a year. Experts recommend that investors should not sell investments on short-term market movements as they will not only end up paying more tax but will also miss out on the opportunity to earn higher returns.
HOW TO INVEST IN SMALLCAP FUNDS ?
Just like every other investment decision, before signing the dotted line, one must properly determine financial goals, risk tolerance, and investment horizon.
You can easily start investing in mutual funds through the ZFunds App available on the Google Play Store.
There are some very easy and simple steps to start investing in a Large-cap mutual fund. Follow the below-mentioned steps to start investing:
- Create your free account with ZFunds. If you already have an account with ZFunds, you can simply log in to it.
- To create an account, you will be required to upload your identification documents which can include an Aadhar card, pan card, Voter ID card, driving license, passport, or any other document which is issued by the central or state government.
- You will also be required to upload your address proof.
- After that, you just need to select the best fund which suits you as per your investment horizon and risk.
- And, then at last you just need to choose whether you want to do lump sum investment or start a sip.
After the successful investment, the units will be allotted and investment will be reflected in 2-3 working days in your ZFunds account.
WAYS TO INVEST
- Lump-Sum Investing:
Lump-Sum investment in mutual funds can be made by investors who have a large sum to invest at one go.
- Systematic Investment Plan:
SIP is suitable for investors who want to invest a small portion of sums at regular intervals for a specified tenure. For instance, one can set it up to autopay Rs.x two days after one gets a salary, for the next 10 months. SIP provides a disciplinary investment approach which helps to accumulate a large corpus over a long period of time.
Best Mid Cap Funds to Invest in India
Best Large Cap Funds to Invest in India
Best Multi Cap Funds to Invest in India
Best ELSS Funds to Invest in India
ELSS vs FD
Tax Free Bonds
What is SEBI
How to Invest in Mutual Funds in India ?
What is Rupee Cost Averaging
RD vs SIP