Small Cap Funds are those that invest in the shares of smaller companies. The term ‘cap’ is an abridged form of the word ‘capitalisation’ which refers to the market value of the company’s shares in the stock market.
Small Bets
Small cap stocks are regarded as attractive because they have the latent potential to develop into high value, high return stocks. But, the stock market is full of small cap stocks and it is difficult to identify the multibaggers when they are still reasonably priced. The investor who wishes to profit from the growth of such stocks could invest in small cap funds.
Investment Mix
The fund manager does not restrict investments exclusively to small cap stocks. 25% to 35% of the portfolio would be invested in mid-cap stocks and a smaller proportion (usually less than 10%) in large cap stocks. The rest would be in small cap stocks but with flexibility to reduce such investment even below 50% should the circumstances warrant.
Returns
These funds are governed by a high-risk/high-return matrix. The stocks are often an unknown quantity and limited trading makes it difficult to cash in on upsides. Such funds are suitable only for investors with an appetite for risks and a long term horizon of around three to five years.
Thanks for sharing the relevant information !!! when we read or hear small cap mutual funds , we usually do not understand where these funds actually invest money in.Just because these fund are cheaper to buy , do not mean that we have gotten a good deal.Small cap shares are usually small companies having little share price , which may or may not be preferred by the average invetsors.This is because such stocks pertain to B or C class , which are usually infamous for intraday or insider trading.So understand the risk while you buy small cap funds.If your risk appetite is strong, then only enter this avenue , as he says higher the risk , higher the rewards also.