Every person who begins earning is given one common advice,“You become rich only when you consume less than what you produce”.
This doesn’t happen with a salaried job, but by investing regularly in stock market.
Any professional will underscore the importance of being financially independent. You can’t be financially independent just because you have a nice job with a 6 figure salary. Your needs grow faster than your salary. This is where financial intelligence is important. If you can make your money work for you, all your goals shall seem attainable.
That brings us to the Indian Stock Market. An ambitious person will look at the best investing options and diversify his investments. Small-cap funds are popular among investors who are willing to take risks and go big. It is always advisable to have a small portion of your portfolio dedicated to these small-cap mutual funds which might give you some great returns in the longer run.
What are small-cap mutual funds?
Small-cap equity mutual funds invest in equity shares of companies that have a smaller market capitalization. These have potential to give higher returns because of the fact that these companies are young, and tend to expand aggressively. At the same time these are vulnerable to economic slowdown when compared to larger companies. Investors who have an appetite for risks can go for such funds in the market.
What makes it popular?
Small-cap funds are bound to generate higher returns in years to come. There are over 2000 small-cap funds available. When it comes to the BSE small cap index, there is a lack of proper coverage and information. Since the options available in small-cap funds are diverse, it continues to be a great option – as there are many companies which can give you great returns on investment.
Who should invest in small-cap funds?
As we said before, investing in small-cap fund tends to carry greater risk when compared to other mid or large cap funds. An investor who has an appetite for taking risks and is willing to invest for upto 10 years should definitely look at these funds. Someone who has a long term goal like buying a luxury product, a home, education or any such product that could involve lot of money- should keep an eye on small-cap funds.
A good strategy while looking at small-cap funds is to invest through SIPs (Systematic Investment Plans).
Things to consider before investing in small-cap funds?
- Risk: Small-cap funds are lesser established companies who can go out of business in case of a market crash. This is one major reason why people avoid investing in such high risk funds. At the same time if everything goes well, the gains could be enormous.
- Return on investment: This is better left unsaid. Every single investor has returns on their mind when investing. They look at potential gains before investing and hope that they get best returns in the longer run. No other fund offers better returns than a small cap fund.
- Investment period: The market is bound to fluctuate throughout the year. There are times when the downfall is unbearable to an investor. If you cannot manage to stay invested for over 5 years, don’t think about investing here.
- Goals: Historically speaking, the market has always seen small cap funds generate better returns. The scope for growth is immense. You could end up making some staggering returns, that can help you retire fast. For someone with a long term financial goal, this is the perfect investment and one that could pay handsome dividends.
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