Explained: Small-Cap Mutual Funds

Are you an investor looking to generate an inflation-beating return in the long run?

There are multiple ways in which, you as an investor can generate an inflation-beating return.

Based on the Stock market, it can be classified as Small-Cap, Mid-Cap, Large-Cap Mutual Funds and so on.

Will investing in Small-Cap Mutual funds suit your investment portfolio? Let’s See!

Now let’s see how Small-Cap Mutual Fund works and whether it caters to your financial goals.

Table of Contents

1.) What is Small Cap Mutual Fund?
2.) What are the advantages of Small Cap Mutual Funds?
3.) What is the risk profile of Small Cap Mutual Funds?
4.) How do we gain maximum return on Small Cap Mutual Funds?
5.) What is the tax liability of Small Cap Mutual Funds?

What is Small Cap Mutual Fund?

In Small Cap Mutual Funds majority of the equity funds are invested in Small Cap Companies. 

The companies whose market capitalization is below 5,000 cores are called Small Cap Companies. There are a total of 250 Small Cap Companies in the market.

Small Cap Mutual Funds invest in purchasing the stocks of startup companies that are highly volatile. That is, why investing in Small Cap Mutual Funds is considered highly risky, especially for new investors.

Since there is so much risk involved, it is necessary for us as investors to choose wisely.

What are the advantages of Small Cap Mutual Funds?

Let’s imagine you are a seasoned investor and have mastered the art of investing. 

Then you should consider investing in Small Cap Mutual Funds, which would help you reap a maximum return for your investment.

These are some key features of Small Cap Mutual Funds;

• It is suitable for investors with high-risk appetites.

• It has the potential to generate high returns than the Large & Mid Cap Mutual Funds.

• Investors have a broad range of options to invest.

• Small Cap Mutual Fund has the potential to generate exponential return during the market uptrend.

What is the risk profile of investing in Small Cap Mutual Funds?

There is always a risk involved when you invest in Mutual Funds irrespective of the category you choose to invest in. 

But the risk level involved varies with different types of Mutual Funds.

Let’s now discuss the risk involved in investing in Small-Cap Mutual Funds.

Many investors will avoid investing in Small Cap Mutual Funds due to the level of risk and high volatility involved despite it having the potential to generate high returns than Mid-Cap and Large-Cap Mutual Funds. 

This type of mutual fund is well suited to seasoned investors and investors with a high-risk appetite.

How do we gain maximum return on Small Cap Mutual Funds?

It is not a good choice for investors with short-term financial goals. Despite having the potential to generate an exponential return for investment, it does not guarantee investors a fixed return.

So, as an investor, if you want to gain maximum benefits from this investment. Then you will have to invest for a longer period.

The ideal period of this investment will remain from 5-7 years.

What is the tax liability of Small Cap Mutual Funds?

If the redemption is done within a year, it is called Short Term Capital Gain and it attracts 15% of tax.

It is called Long Term Capital Gain for redemptions done after a year and attracts 10% of tax.

However, if your Long-Term capital gain is less than one lakh then it will be exempted from tax.

The below video will assist you with the right guidance on whether investing in Small Cap Mutual Funds suits your investment portfolio or not.

What is Small Cap Fund? – Watch here