Ready to diversify? Experts advocate small caps for seasoned investors

Mutual fund investment: Small-cap funds are gaining attention for their potential to yield substantial returns. Focused on companies with a market capitalisation below Rs 5,000 crore, these funds carry higher risk compared to mid or large-cap counterparts. Despite the elevated risk, experts highlight their capacity to outperform in the long run.

"Investors considering small cap mutual funds in should evaluate their risk appetite and investment goals. These funds are suitable for those already in the market, seeking diversification beyond traditional investment avenues," said Aastha Gupta, CEO, Share India FinCap.

Given their inherent risk, small-cap funds are ideal for investors willing to weather short-term fluctuations for the prospect of long-term growth.

Before delving into small-cap investments, investors should weigh several factors. The high volatility associated with these funds necessitates a careful consideration of risk tolerance.

"Expertise in mutual fund investments is important, given the complex dynamics and strategy involved in managing small cap portfolios. Additionally, small cap funds are best suited for investors with a long investment horizon, as they may experience short-term fluctuations," Gupta added.

Risk dynamics

Despite their potential advantages, investing in small-cap mutual funds comes with notable risks.

"High volatility is a key concern, as prices of small cap stocks can fluctuate dramatically, leading to substantial losses if market movements do not align with expectations. The performance of small cap funds is contingent on factors such as stock selection and fund manager interventions, making it important for investors to stay informed," said Amit Gupta, MD, SAG Infotech.

Liquidity can also be a challenge with small-cap funds, as they are often less favoured by institutional investors. This can result in lower engagement amongst retail investors and potential difficulties in buying or selling fund units in the market.

For new investors, the suitability of small cap funds depends on their risk tolerance and level of expertise. While these funds can offer rewarding returns, especially in the long term, they are known for their volatility. Therefore, investors with more experience may find small cap funds to be a valuable addition to their portfolios.

Volatile yet valuable

When considering returns, small cap funds are known for delivering stable performance over the long run, despite short-term market fluctuations. While they may be risky and volatile in the short term, the potential for rewarding returns makes them attractive for investors with a long-term investment horizon.

Groww has highlighted top-performing small-cap mutual funds for potential investors. Notable funds include Axis Small Cap Fund, demonstrating annualised returns of 31.47 per cent in the past three years and 28.14 per cent in the last 5 years, Nippon India Small Cap Fund with returns of 41.79 per cent and 29.2 per cent, and Tata Small Cap Fund showing strong performance with annualised returns of 37.95 per cent and 27.95 per cent.

Edelweiss Small Cap Fund, ICICI Prudential Smallcap Fund, Kotak Small Cap Fund, Quant Small Cap Fund, and HSBC Small Cap Fund also exhibit good performance. These funds provide diverse options for investors seeking growth in small-cap companies.

Experts recommend thorough research and consideration of individual financial goals and risk tolerance before making investment decisions.

These funds exhibit varying levels of annualised returns over different time frames, and minimum investment amounts for lump sum and SIP investments vary. Experts recommend thorough research and consideration of individual financial goals and risk tolerance before making investment decisions.