Small cap funds have drawn a lot of attention from investors looking for exposure to those businesses that are capable of growing in the long run. These funds usually invest in companies listed below the top 250 companies based on market capitalisation. Depending on their market segment, these funds may experience wider price movements and relatively higher volatility. However, they may bring the potential for long-term value creation. This article explains some important points to help you make an informed decision while choosing a small cap fund for your portfolio.
Understanding Small Cap Funds
A small cap fund usually invests a major portion of its corpus in companies that have relatively lower market capitalisation. According to SEBI classification, these include companies ranked 251 and onwards. These firms are usually in the initial phases of growth and may gradually expand operations. The small cap fund is often riskier than larger-cap counterparts and are usually considered by investors who are looking to diversify their portfolios with growth-oriented options.
How Do Small Cap Mutual Funds Work?
Small cap mutual funds function generally based on pooling funds from many investors and investing them in the shares of small-cap companies. The fund is professionally managed by fund managers who keep a watch on market trends and monitor the performance of companies. Since small cap stocks react sensitively to market conditions or company developments, the fund's performance may vary based on the performance of these companies under varying economic cycles.
How to Choose Small Cap Fund for Your Portfolio
Choosing a suitable small cap fund typically involves evaluating a mix of fund-related and market-related parameters. Some of the key parameters you may consider while choosing a small cap fund include:
Fund Manager’s Experience
An experienced fund manager often contributes towards handling volatility in the small cap space. A manager with a steady track record in this category may help manage risk effectively. You may check historical fund decisions and how consistently they align with market opportunities without being influenced by short-term trends.
Investment Strategy and Portfolio Composition
Reviewing the fund’s investment strategy may help understand its core approach, whether it focuses on diversified exposure or sector-specific small caps. A well-structured portfolio typically maintains a balance between high-potential stocks and companies with stable fundamentals. Evaluating the fund’s holdings may offer insights into how risk is spread.
Long-Term Performance and Volatility Pattern
Past performance could offer insights into how the fund managed during different phases of the market. While this does not indicate future behaviour, it may help understand the volatility pattern and how the fund responded to market changes.
Expense Ratio and Exit Load
A fund’s expense ratio may affect overall earnings as it includes management and operational costs. Lower expense ratios may lead to relatively higher retained value for investors. You may also check the exit loads, especially if you plan to withdraw investments before a certain holding period.
Conclusion
Selecting a small cap fund requires patience, a long-term outlook, and clarity on personal investment goals. While this fund category often suits investors with a higher risk tolerance, evaluating fund strategy, performance trends, and manager expertise may improve selection. Among available market options, schemes offered by financial institutions like Axis MF have gained attention for their structured investment frameworks. However, the ultimate choices usually depend on financial goals and market views over time.
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