All You Need To Know About Small-Cap Funds

Small-cap funds have a larger universe of stocks as compared to large-cap and mid-cap. This allows them to invest in stocks that are undiscovered, which in turn allows them to get more returns as compared to large-cap and mid-cap funds. However, it also involves more risk. DSIJ elaborates on all that you should know about small-cap funds.

There are around 5000 companies that are listed in the stock exchanges in India, and out of them, around 93 percent of the companies fall under the small-cap category, according to the latest market capitalization data available from AMFI (Association of Mutual Funds in India). These have a market capitalization which ranges from 0.02 crore to 8518 crores. Small-cap funds have a larger universe of stocks to select from when compared to large-cap and mid-cap funds. So, there is a lot more probability that fund managers may find stocks which are still undiscovered by the market and hence can create alpha for its investors.

According to SEBI's (Securities and Exchange Board of India's) circular on recategorization, small-cap funds are those that invest a minimum 65 percent of their total assets in equity and equity-related instruments of small-cap stocks. Even with respect to the universe of stocks, SEBI has defined it as any company that falls on or beyond the 251st company in terms of full market capitalization. The objective of an open-ended equity small-cap fund is to predominantly invest in small-cap stocks.

The small-cap funds have on an average generated 15.5% in a 10-year period compared to large-cap funds, which have generated 11.1%. This always puzzles investors, who are always curious about the exceptionally higher returns that these funds generate over a longer period of time. However, an investor should also understand the high risk involved while investing in small-cap funds. So, before investing in small-caps, it is very important to take into consideration not just returns but also the risk involved.