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Overview
Small cap mutual funds primarily invest in smaller listed companies. These businesses can offer significant growth potential, but they also tend to carry higher volatility, business risk and liquidity risk than larger companies.
Small cap funds are therefore not simply higher-return versions of other equity funds. Investors need the financial capacity and investment horizon to withstand potentially deep and prolonged market declines.
Explained
Small cap mutual funds are equity schemes that primarily invest in stocks classified within the small-cap segment under SEBI's applicable mutual fund framework.
Small companies may operate in emerging industries, niche markets or rapidly growing business segments. Some can eventually develop into much larger businesses.
Others may struggle because of competition, weak finances, economic slowdowns or poor execution. This wide range of outcomes makes stock selection and diversification particularly important.
Explained
The fund manager builds a portfolio primarily from eligible small-cap companies.
Research teams may examine:
Investors receive units whose NAV reflects the value of the portfolio.
Small-cap share prices can move rapidly during both market rallies and corrections. As a result, investors should expect periods when the value of their investment falls substantially.
Suitability
Small cap mutual funds may suit investors who:
They may not be appropriate for conservative investors or for money required for short-term goals.
Advantages
Small cap funds provide access to businesses that may be at relatively early stages of their growth journey.
Successful small businesses can grow substantially as revenue, profits and market share expand. Investors may participate in this growth through the fund. There is no assurance that individual companies or the overall fund will achieve this outcome.
Researching smaller companies can be challenging because information and analyst coverage may be less extensive than for large companies. Professional fund management can help investors evaluate this broad universe.
A small cap mutual fund spreads money across several companies instead of relying on a handful of individual small-cap stocks. Diversification reduces individual-company dependence but does not remove small-cap market risk.
Before you invest
Small-cap stocks can experience sharp rises and falls. Investors should consider whether they can stay invested when portfolio values decline significantly.
Trading liquidity can become an important issue in the small-cap segment. During difficult market conditions, buying or selling some securities can become harder without affecting prices.
Small cap funds are generally unsuitable for short-term goals. Investors need sufficient time to tolerate market and business cycles.
Review the number of holdings, position sizes and how the fund deploys capital. Managing a very large portfolio in less-liquid parts of the market can present additional challenges.
Periods of strong investor interest can push small-cap valuations higher. Paying excessive valuations can reduce future return potential and increase downside risk.
A fund that produced exceptional recent returns is not automatically the best future investment. Look at consistency, portfolio quality and risk rather than a single return number.
Taxation
Small cap mutual funds generally qualify as equity-oriented funds when they meet the applicable requirements under Indian tax law.
For qualifying units held for more than 12 months, gains are generally classified as long-term capital gains. LTCG covered by Section 112A is taxed at 12.5% above the applicable annual exemption threshold.
For qualifying units held for 12 months or less, gains are generally treated as short-term capital gains and taxed at the applicable special rate under Section 111A.
Investors should confirm prevailing tax rules at the time of redemption.
Step by step
Good to know
A small cap mutual fund is an equity scheme that primarily invests in companies classified within the small-cap segment under the applicable regulatory framework.
Yes. Small-cap stocks can carry substantial market, business, valuation and liquidity risks. Investors should be prepared for significant fluctuations.
There is no guaranteed minimum period that makes small-cap investing safe. They are generally more appropriate for long-term goals because investors need time to withstand market cycles and potentially extended periods of poor performance.
Yes. Small cap mutual fund NAVs can decline, and investors can lose money.
The primary difference is the size classification of companies in which each category invests. Small cap funds focus on smaller companies, while mid cap funds primarily invest in medium-sized companies. Their risk and liquidity characteristics can also differ.
An SIP can be used to invest gradually in a small cap fund. It can spread purchases across different market levels, but it does not guarantee profits or protect against losses.
Recap
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FUND
Bandhan Small Cap Fund Direct GrowthEquity Small-Cap₹56.44
2.08%
9.1%
23.94%
19.05%
ITI Small Cap Fund Direct GrowthEquity Small-Cap₹37.74
3.5%18.42%
23.85%
18.63%
Invesco India Small Cap Fund Direct GrowthEquity Small-Cap₹53.14
2.39%13.47%
22.16%
19.64%
Bank of India Small Cap Fund Direct GrowthEquity Small-Cap₹64.77
2.38%24.01%
20.8%
19.47%
LIC MF Small Cap Fund Direct GrowthEquity Small-Cap₹39.53
3.12%13.38%
18.02%
17.5%
Quant Small Cap Fund Growth Option Direct PlanEquity Small-Cap₹314.48
2.38%12.63%
16.88%
19%
DSP Small Cap Fund Direct Plan Payout of Income Distribution cum capital withdrawal optionEquity Small-Cap₹69.01
2.36%15.14%
16.74%
17.31%
Union Small Cap Fund Direct GrowthEquity Small-Cap₹65.81
3.48%19.13%
16.53%
16.74%
Sundaram Small Cap Fund - Direct Plan - Growth OptionEquity Small-Cap₹328.91
2.33%13.34%
16.34%
16.58%
PGIM India Small Cap Fund Direct GrowthEquity Small-Cap₹19.79
2.7%11.37%
15.75%
13.34%
Bandhan Small Cap Fund Direct Payout of Income Distribution cum Capital Withdrawal optionEquity Small-Cap₹39.28
2.08%8.82%
23.4%
18.61%
ITI Small Cap Fund Direct Payout Inc Dist cum Cap WdrlEquity Small-Cap₹35.78
3.5%16.03%
23%
18.15%
Invesco India Small Cap Fund Direct Reinvestment of Income Dist cum Capital WtdrlEquity Small-Cap₹39.48
2.37%12.61%
21.03%
18.98%
Bank of India Small Cap Fund Direct Reinvestment of Income Dist cum Cap WdrlEquity Small-Cap₹48.51
2.37%24.03%
20.8%
19.47%
LIC MF Small Cap Fund Direct Reinvestment of Income Distribution cum Cap WdrlEquity Small-Cap₹39.53
3.12%13.37%
18.01%
17.5%
Quant Small Cap Fund Reinvestment of Income Distribution cum capital withdrawal Option Direct PlanEquity Small-Cap₹245.83
2.38%12.63%
16.88%
19.01%
DSP Small Cap Fund Direct Plan GrowthEquity Small-Cap₹251.42
2.36%15.14%
16.74%
17.73%
Union Small Cap Fund Direct Reinvestment of Income Distribution cum capital withdrawalEquity Small-Cap₹43.31
3.48%17.41%
15.97%
16.4%
Sundaram Small Cap Fund Direct Plan Payout of Income Distribution cum Capital WithdrawalEquity Small-Cap₹40.54
2.33%12.91%
15.59%
16.02%
PGIM India Small Cap Fund Direct Payout of Income Distribution cum capital withdrawal optionEquity Small-Cap₹15.57
2.75%10.58%
15.16%
12.97%
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