The stock markets are correcting as RBI hikes interest rates in the economy. You must keep an eye on economic trends and grab opportunities to explore businesses with the potential to grow over time. Stock market corrections are great times to look at small businesses with the potential to do well over time. You must wait for an economic rebound where small companies do well compared to their larger counterparts. Is there any way to get exposure to small businesses and profit from an economic rebound? Yes, you can try small-cap funds.
What are small-cap mutual funds?
Small-cap funds are a class of equity mutual funds that invest mainly in stocks of companies whose market capitalisation is below Rs 5,000 crore. Small-cap funds are suitable for those willing to take high risks and know when to exit the investment. These funds perform well in a bull run and can steeply crash when stock markets fall. The performance of small-cap funds is measured against the Nifty Smallcap 100 TRI. It delivered a stellar performance of over 100% in one year between May 2020 to May 2021. However, it fell over 45% between April 2019 and March 2020.
Invest in small-cap funds
Advantages of investing in small-cap funds
Look at the latest concepts:
As Small-cap funds may invest in companies that focus on disruptive technologies, they can attain a competitive advantage over rivals which translates to a significant market share.
Massive growth potential:
As small-cap funds invest in companies that may become multi-baggers, they offer opportunities to grow wealth during an economic recovery.
Available at lower prices:
Small-cap funds invest in relatively new companies that may be undervalued and available at a lower price. It could outperform mid-cap and large-cap funds during a bull run. The following are the top-performing small-cap funds available on the FinPlay app; you can choose the one that matches your risk profile
Name of the fund
3 Yr Return
Quant Small Cap Fund
Canara Robeco Small Cap Fund
Kotak Small Cap Fund
Things to consider before investing in small-cap funds
As the small-cap segment has short boom and bust cycles, it is suitable for aggressive investors who know when to exit the investment.
You must gauge the performance of small-cap funds across bull and bear markets, more so during a bear market, to check the downside protection during a market correction.
Investing via SIP:
SIPs don’t work for small-cap funds as you have to time the market to maximize returns.
Investing in small-cap funds offers opportunities to earn attractive returns over time.