Small Cap Mutual Fund<\/a><\/strong> is a sub-category of equity mutual funds that is known for its very high return potential. However, they also tend to be riskier compared to most other categories due to the higher volatility, low liquidity, and higher downside risk associated with small-cap stocks. Accordingly, the Systematic Investment Plan (SIP)<\/a> mode is preferable when it comes to investments in Small Cap Mutual Funds as it can help mitigate the risk.<\/p>\n\n\n\n

In the last 10 years, six Small Cap Mutual Funds generated SIP returns of 20% or more, thus turning out to be top-performing schemes in the category. The top-performing SIP generated XIRR of 25.9% during this period.<\/p>\n\n\n\n

[Read: <\/strong>5 Best Small Cap Mutual Funds to Invest in 2023 – Top Performing Small Cap Mutual Funds in India<\/a>]<\/p>\n\n\n\n

What are Small Cap Mutual Funds?<\/strong><\/p>\n\n\n\n

Small Cap Mutual Funds are equity-oriented mutual funds<\/a> that are mandated to invest a minimum of 65% of their total assets in equity and equity-related instruments of small-cap companies (companies ranking from 251st onwards in terms of full market capitalisation). Generally, these companies have a market cap of less than Rs 5,000 crore.<\/p>\n\n\n\n

Small Cap Mutual Funds are high risk – high return investment avenues. These companies have the potential to climb up the leadership ladder to become mid-caps or even large-caps of tomorrow. Thus, Small Cap Mutual Funds can potentially generate very high returns and give a boost to the equity mutual fund portfolio.<\/p>\n\n\n\n

However, it is important to note that there are various risks associated with small-cap companies. These companies have smaller operations with limited access to various resources. At times, if there is a constraint on resources, they may face risk to survival in case of economic downturn.<\/p>\n\n\n\n

Further, there is liquidity risk associated with them as the limited number of shares makes it difficult for investors to buy and sell as per their wish. That said, a strong business helmed by a well-built management team, along with the availability of stock at a reasonable price, can make it a very attractive investment.<\/p>\n\n\n\n

Small Cap Mutual Fund category average SIP returns over different time frames<\/em><\/strong><\/p>\n\n\n\n

<\/p>\n\n\n\n

Past performance is not an indicator of future returns.
Data as of August 11, 2023
Returns are XIRR in percentage
Direct plan – Growth option considered
(Source: ACE MF, data collated by PersonalFN) <\/p>\n\n\n\n

What is an SIP?<\/strong><\/p>\n\n\n\n

The SIP mode allows mutual fund investors to invest a certain fixed sum regularly over the long term in the scheme\/s of their choice. This helps develop a financial discipline – the key to successful investing. It also enables averaging of investment costs as more units are added when the equity markets are trading low and fewer units when the markets are scaling up. This feature enhances the power of compounding, allowing the investors’ wealth to grow leaps and bounds over the long term. The tool used to calculate SIP returns is known as XIRR (Extended Internal Rate of Return).<\/p>\n\n\n\n

[Read: <\/strong>5 Key Benefits of Investing in Mutual Funds via SIP<\/a>]<\/p>\n\n\n\n

[Read:\u00a0<\/strong>What is XIRR in Mutual Funds? And How to Calculate it?<\/a>]<\/p>\n\n\n\n