An investment tool aims at a single goal: wealth creation. Mutual funds are the preferred choice for achieving this goal. Mutual funds are classified into many types: Debt funds, equity funds, small cap funds, mid-cap funds and so on.
In this article, let’s have a detailed look at small cap mutual funds.
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Small cap funds are a type of equity mutual fund. Investment is in stocks of companies with smaller market capitalization. Market capitalization means the market value of a company’s outstanding shares divided by the number of outstanding subscribers. Generally, the market capitalization of small cap firms is below Rs 500 Crores.
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While investing in a small cap fund, there are a number of things to be considered.
Small cap funds are very risky. Even a slight fluctuation in the market, is likely to impact the share prices of small cap funds.
Though risky, small-cap firms have huge growth potential. Although it takes time for small firms to grow, they are more likely to grow within a few years. Long term investment in small cap funds (7 to 10 years) fetches desirable returns.
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Fund houses generally charge a sum for administering and managing stocks. It is ideal to choose a fund with lower expense ratio to get higher returns over a period of time.
Small cap funds will give good returns if invested over a longer duration of time. Therefore, it is a suitable option if you have long term goals like saving up for retirement, children’s education and so on.
Small cap funds must be invested for a longer time ranging from 7 to 10 years. This is because market dynamics affect the stock prices and investing for a longer time helps balance out these fluctuations.
Small cap funds have a number of advantages that makes them an attractive investment.
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Small cap funds have the potential to give high returns. They can yield high returns when the market trends are favorable. You must invest over a long period of time, so that sufficient time is given to the fund for generating returns.
Small cap funds are eligible for two types of tax deductions. These are:
If the investment is held for more than a year, then capital gains are considered to be long term capital gains (LTCG). LTCG up to Rs 1 Lakh is tax free. Beyond this limit, it is taxed at 10% (without indexation).
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SL. NO |
FUND NAME |
1 YEAR RETURNS (%) |
3 YEAR RETURNS (%) |
5 YEAR RETURNS (%) |
1 |
Axis small cap fund |
26.49 |
16.55 |
12.73 |
2 |
HDFC small cap fund |
-2.74 |
12.23 |
10.37 |
3 |
L&T emerging business fund |
0.67 |
10.68 |
11.40 |
4 |
Nippon India small cap fund |
6.60 |
11.45 |
11.41 |
5 |
Franklin smaller companies fund |
0.50 |
5.36 |
7.91 |
Each investment option has risks and advantages. Before investing; all you must do is monitor your current situation and pick the investment scheme that is ideal.
If you are capable of taking risks and trust the growth of a small cap company, then go forward and invest!
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