Equity: Small Cap

What is it?

Smallcap equity mutual funds invest in relatively small companies. SEBI guidelines require small-cap funds to invest 65% of total funds in small-cap companies. The SEBI defines small-cap companies as those ranked from 251 and thereafter by market capitalization.

Objective

The objective of the small-cap fund is to generate maximum returns by investing in small companies.

Suitability and opinion

Smallcap funds are suitable for high risk investors. Small-cap funds involve high risk. According to the SPIVA report, more than 80% of small-cap funds outperform their benchmark in the 5-year time horizon. So, the fund manager's ability has a huge influence on the performance of the funds. These funds have very high volatility and can show very high levels of drawdowns during a market downturn. We feel one must check the fund performance before investing in a small-cap fund. This category can be a good choice for aggressive investors with a time horizon of at least 5 years.