If you are a risk taker and believe in high returns, then small-cap equity funds can be the right investment for you. Since these funds invest in companies with market capitalization up to Rs 5,000 crores, they have the potential to grow and generate high returns. However, with high returns comes the possibility of high risks. These funds are volatile in nature and thus require a strategic approach to minimise risks and maximise returns.
Having said that, let’s explore some valuable insights on how to invest in small cap mutual funds the right way to capitalise on their growth potential.
- Opt for a scheme with a lower expense ratio
Expense ratio is the fees that mutual funds charge to cover their costs for research, administration, and other expenses. Choosing a fund with a lower expense ratio means that you will pay less in fees, leaving more of your investment to grow over time. While low expense ratios do not automatically guarantee best performance, it can help in reducing fee costs and increase your overall returns.
- Be prepared for higher risk
Investing in small-cap equity mutual funds can give you an opportunity to earn higher returns, but you must also have a high risk appetite.
Small-cap companies are less established, and more vulnerable to market fluctuations than larger companies. Their share prices are more volatile and can fluctuate quickly due to economic conditions, geopolitical events, and industry trends. So, most experts advise investors to have a diversified portfolio to mitigate risk and capitalise on the high growth potential of these mutual fund schemes.
- Start an SIP
Small cap funds are volatile in the short term. But over the long term, they can generate high returns as the market rebounds. Thus, it is important to be patient and have a long-term horizon with these funds.
Starting a systematic investment plan (SIP) is a smart way to make regular and automated investments into the funds. SIP leverages rupee-cost averaging over time where you buy more units during bear markets and less units in bull markets. With this strategy, your average cost becomes lower over time.
Moreover, you can also step up your SIP and increase the investment amount in future. This helps you invest in mutual funds as per your income, current inflation rate, and other financial goals.
- Choose fund houses and managers carefully
Go for experienced fund houses and managers who are well-known for their skills in managing small cap schemes. As small cap companies are not widely known in the market, identifying promising businesses requires expertise and thorough research. A skilled fund manager is capable of making informed decisions, taking meaningful stakes, and holding them despite market fluctuations to earn good returns.
You can read scheme-related documents offered by the fund to get detailed insights into fund managers, their philosophy, investing style, and how they approach risk. This way, you can invest in mutual funds more efficiently.
Investing in small cap mutual funds can be a smart move for those looking to grow their portfolio. With their potential for high returns and growth, these funds can be a valuable addition to any investment strategy. Of course, investing always comes with some risk. But rather than panicking when markets become volatile, it’s important to take advantage of these fluctuations and look for undervalued stocks that have growth potential and can bring profits over time.