Want to make money from Mutual Funds? Should you buy small-cap funds? See how you can profit

Small-cap mutual funds move faster than mid-cap and large-cap funds and in an investment of 10 years or more, it gives 4 per cent more returns than a large-cap fund, say experts.

SBI small-cap fund and HDFC Small-cap fund can be a good option for those investors who are looking for investing in small-cap mutual funds. Photo: Reuters

Mutual Funds: According to new SEBI guidelines, small-cap mutual fund schemes are the equity-oriented mutual fund schemes which have to invest at least 80 per cent of their corpus in small companies. SEBI has defined small companies as companies that are other than the top 250 listed companies in terms of market capitalisation. As per the tax and investment experts, small-cap funds move at a faster pace in comparison to mid-cap and large-cap funds as their volume is comparatively lower than mid-cap and large-cap funds. But, selection of small-cap, mid-cap or large-cap mutual fund depends upon the risk appetite and risk-taking ability of the mutual fund investors, say experts.

Speaking on the small-cap mutual funds Balwant Jain, a Mumbai-based tax and investment expert said, "Any scheme which invests and remains invested at least up to 80 per cent of its corpus in these companies are categorised as small-cap funds and they are free to deploy their balance 20 per cent in anywhere whether in debt funds or companies from top 250 companies." Speaking on the risk factor involved into the small-cap mutual funds Balwant Jain said, "Because of their investment universe, small-cap mutual fund schemes are extremely risky. They can be beaten down drastically in a sharp fall in the stock market or on the slightest bout of volatility. But small-cap mutual fund schemes also have the potential to offer superior returns over a long period. This is because small-cap schemes bet on small companies with very high growth potential. When a small company becomes a very large company, the shares of the company would appreciate multiple." However, for long-term (means 10 years or more) he said that small-cap mutual funds would give around 4 per cent more returns than large-cap mutual funds.

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SEBI registered investment and tax expert Jitendra Solanki said, "Small-cap mutual funds have low volume in comparison to large-cap and mid-cap mutual funds. So, a small-cap mutual fund gives the fastest movement in comparison to both mid-cap and large-cap schemes. So, when the market appreciates, small-cap mutual funds appreciate at a faster rate than mid-cap and large-cap mutual funds. However, when the market nosedives, small-cap mutual funds dip at a faster rate than mid-cap and large-cap funds. So, small-cap mutual funds are for those investors who are looking for long-term investment goals but they should be ready to handle the risk involved in it."

Asked about the small-cap mutual funds that an investor can choose while investing for long-term Balwant Jain said, "SBI small-cap fund and HDFC Small-cap fund can be a good option for those investors who are looking for investing in small-cap mutual funds."

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