{"id":5310,"date":"2025-01-07T10:19:01","date_gmt":"2025-01-07T10:19:01","guid":{"rendered":"https:\/\/lemonn.co.in\/blog\/?p=5310"},"modified":"2025-01-22T12:25:08","modified_gmt":"2025-01-22T12:25:08","slug":"3-reasons-why-you-should-not-invest-in-small-cap-funds","status":"publish","type":"post","link":"https:\/\/lemonn.co.in\/blog\/mutual-fund\/3-reasons-why-you-should-not-invest-in-small-cap-funds\/","title":{"rendered":"3 reasons why you should not invest in small-cap funds"},"content":{"rendered":"<figure class=\"wp-block-post-featured-image\"><img loading=\"lazy\" decoding=\"async\" width=\"890\" height=\"501\" src=\"https:\/\/lemonn.co.in\/blog\/wp-content\/uploads\/2025\/01\/3-reasons-why-you-should-not-invest-in-small-cap-funds-.jpg\" class=\"attachment-post-thumbnail size-post-thumbnail wp-post-image\" alt=\"reasons not invest small cap funds\" style=\"object-fit:cover;\" srcset=\"https:\/\/lemonn.co.in\/blog\/wp-content\/uploads\/2025\/01\/3-reasons-why-you-should-not-invest-in-small-cap-funds-.jpg 890w, https:\/\/lemonn.co.in\/blog\/wp-content\/uploads\/2025\/01\/3-reasons-why-you-should-not-invest-in-small-cap-funds--300x169.jpg 300w, https:\/\/lemonn.co.in\/blog\/wp-content\/uploads\/2025\/01\/3-reasons-why-you-should-not-invest-in-small-cap-funds--768x432.jpg 768w\" sizes=\"auto, (max-width: 890px) 100vw, 890px\" \/><\/figure>\n\n\n<h2 id='what-is-a-small-cap-fund'  id=\"boomdevs_1\" class=\"wp-block-heading\">What is a small-cap fund?<\/h2>\n\n\n\n<p>A small-cap fund is a mutual fund that invests at least 65% of its pooled money in shares of small-cap companies. Small-cap companies are those firms whose market capitalization is generally below Rs. 5,000 crores and ranked 251 or below among listed companies on the exchange.&nbsp;<\/p>\n\n\n\n<p>Small-cap funds invest some portion of their corpus in mid- or large-cap stocks to stabilize their portfolio. While small-cap funds are some of the best-performing funds for 10 years, they are also prone to volatility, making them riskier than large-cap or index funds.<\/p>\n\n\n\n<p>The high-risk nature of small-cap funds doesn\u2019t make them a suitable investment option for all investors.&nbsp;<\/p>\n\n\n\n<h2 id='why-are-small-cap-funds-not-for-all-kinds-of-investors'  id=\"boomdevs_2\" class=\"wp-block-heading\">Why are small-cap funds not for all kinds of investors?<\/h2>\n\n\n\n<p>Some of the best small-cap funds such as the Nippon Small Cap fund or the Quant Small Cap fund have given stellar returns in the last five years. But does this mean small-cap funds are a holy grail of investments suitable for all investors irrespective of their risk appetite? Let\u2019s find out.<\/p>\n\n\n\n<p>When it comes to risk, investing in shares of a small-cap company is much more riskier than investing in mid-cap or large-cap shares. Small-cap mutual funds invest at least 65% of the pool in small-cap stocks. So, if you are looking for a high-risk, high-return investment, investing in a small-cap fund will serve your purpose.<\/p>\n\n\n\n<p>But, if you are looking for a relatively safe investment with less volatility, an index fund will serve you better.&nbsp;<\/p>\n\n\n\n<p>In short, small-cap funds have a different risk profile compared to index funds or large-cap funds. A risk-tolerant investor can invest in a small-cap fund, but a risk-averse investor should stay away from a small-cap fund as the fund may not suit his risk appetite.&nbsp;<\/p>\n\n\n\n<p>Additionally, when it comes to investments, there is no one-size-fits-all solution, and thus, no mutual fund is ideal for all kinds of investors. For instance, a risk-seeking investor will be dissatisfied with an index fund, while fluctuations of a small-cap fund would unnerve a risk-averse investor.&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Risk<\/strong><\/li>\n<\/ul>\n\n\n\n<p>Small-cap funds pose a significant risk and this may translate to losses in the short run. Therefore, if your aim is capital preservation in the short term, small-cap funds are not for you. This is because markets may be volatile in the short run, leading to losses.<br><br>Additionally, if you are the type of investor who cannot afford to see their investments in the red even for a short period, small-cap funds are not suitable for you. This is because, while small-cap funds give good returns over the long term, market volatility can lead to them lose value in the short term.&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>New Investor<\/strong><\/li>\n<\/ul>\n\n\n\n<p>If you are new to equity markets and mutual fund investing, don\u2019t get swayed by expectations of high returns and start investing in a small-cap fund without understanding the risks associated with them.&nbsp;<\/p>\n\n\n\n<p>As a new investor, you would be better off starting your investment journey with an index fund and then diversifying into higher-risk funds as you start comprehending the risks with equity investments.&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Short-Term Investor<\/strong><\/li>\n<\/ul>\n\n\n\n<p>Small-cap funds are long-term investment products, with capital appreciation as the investment motive. Therefore, they are not suitable for short-term investors who look for capital preservation over capital appreciation.&nbsp;<\/p>\n\n\n\n<h2 id='how-to-invest-in-small-cap-funds'  id=\"boomdevs_3\" class=\"wp-block-heading\">How to invest in small-cap funds<\/h2>\n\n\n\n<p>Here are some ways to invest in small-cap funds:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>SIP\/STP<\/strong><\/li>\n<\/ol>\n\n\n\n<p>A systematic investment plan\/systematic transfer plan involves investing a fixed amount of money at regular intervals, such as monthly or quarterly. SIP is where you invest a fixed amount of money from your bank account, whereas STP is when you transfer a fixed amount from one investment to another automatically. Under STP, the units are redeemed automatically at a fixed date and investors need not do anything.&nbsp;<\/p>\n\n\n\n<ol start=\"2\" class=\"wp-block-list\">\n<li><strong>Long Term<\/strong><\/li>\n<\/ol>\n\n\n\n<p>Small-cap funds are long-term investment products. These are not recommended for short-term investments as investors might lose money in the short term. It is recommended that you stay invested in the product for more than a year if you are looking to invest in a small-cap fund.&nbsp;<\/p>\n\n\n\n<h2 id='conclusion'  id=\"boomdevs_4\" class=\"wp-block-heading\">Conclusion<\/h2>\n\n\n\n<p>While the best small-cap funds generate amazing returns in the long run, the inherent risk of the product doesn\u2019t make it suitable for all investors. Investments in small-cap funds should only be made by risk-tolerant, long-term investors.&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What is a small-cap fund? A small-cap fund is a mutual fund that invests at least 65% of its pooled money in shares of small-cap companies. Small-cap companies are those firms whose market capitalization is generally below Rs. 5,000 crores and ranked 251 or below among listed companies on the exchange.&nbsp; Small-cap funds invest some [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":5407,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_ayudawp_aiss_exclude":false,"footnotes":""},"categories":[23],"tags":[],"class_list":["post-5310","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mutual-fund"],"blocksy_meta":[],"_links":{"self":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/posts\/5310","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/comments?post=5310"}],"version-history":[{"count":1,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/posts\/5310\/revisions"}],"predecessor-version":[{"id":5312,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/posts\/5310\/revisions\/5312"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/media\/5407"}],"wp:attachment":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/media?parent=5310"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/categories?post=5310"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/tags?post=5310"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}