Small-cap funds, a class of equity funds, invest mostly in the stocks of organizations with a market place capitalisation of much less than Rs 5,000 crore. These funds invest in organizations that have higher development possible and focus on newer business enterprise models.
Small-cap stocks and funds are the riskiest when you look at investing in equities from a market place capitalization point of view. Hence, professionals say they are appropriate for these prepared to take higher dangers and are properly informed about the market place to know when to exit.
Harshad Chetanwala, Co-founder, MyWeathGrowth, says, “These companies are at nascent stage and have a long way to go to deliver consistent growth from their businesses. There are more than 4,000 companies after the top 250 companies which are classified as small-cap.”
Small-cap funds have periods of enormous gains and falls. Therefore, professionals say they may not be ideal for investors who adhere to the invest and hold technique. Small-cap funds are identified to execute properly in a bull-run market place. They also steeply crash when the markets fall.
Who need to invest in Small-cap funds?
Even even though compact-cap stocks are thriving, investing in compact-cap funds can be a higher-danger thought. While allocating funds, professionals say, one could look at allocating a compact portion of his/her portfolio towards compact-cap funds due to their volatility.
Chetanwala says, “Many of these companies may go through difficult phases when markets are not doing well and they may take more time to revive or fail to revive as well. Hence, they are meant for investors who have a high-risk appetite.”
However, note that dangers arise from not understanding what one is carrying out. Richa Aggarwal, Senior Research Analyst – Equitymaster, says, “Most small-caps are up in the post-pandemic rally, and a lot are priced to perfection already. The decision to invest in small caps at this stage should not be driven by playing momentum or by fear of missing out.”
She additional adds, “The ideal way to look at it is which small-cap stock one would be comfortable holding even if the cycle turns. And there are quite a few with robust business models and strong management that one can consider for the long term.”
As an asset class, professionals say all investors need to look at compact caps – What could differ is the allocation, based on one’s danger profile and time horizon.
Chetanwala additional adds, “At the same time, note that the allocation towards these funds and companies should not be more than 5-10 per cent of one’s overall portfolio.”