Small-cap mutual funds have emerged in the spotlight due to attractive valuations of late. If past performance is anything to go by, then the small-cap category provided an average return of 19% in the past decade or so.
Market capitalisation or market cap is the value of total shares trading in the stock market of a particular company. Generally, based on the size of market capitalisation, companies are categorised into three types: large-cap, mid-cap, or small-cap.
Markets regulator the Securities and Exchange Board of India (SEBI) has grouped the first 100 companies in terms of market capitalisation as large-cap companies. The companies ranking between 101 and 250 in terms of market cap size are defined as mid-cap companies. And those ranking 251 and onwards are considered small-cap companies.
Small-cap mutual funds invest in quite small companies or their stocks. Equity mutual funds, which invest about 65% of their assets in small-cap companies, are categorised as small-cap mutual funds, as per the SEBI. These are the smallest companies listed on the stock exchange.
Investment in small-cap mutual funds could be a risky proposition as they invest in small companies. The investor in such funds should be ready to take risks and volatility.
Ensure that an investor undertakes adequate research before investing in a small-cap scheme. An investor in small-cap mutual funds must keep an eye on the track record of performance over the past four-five years at least. Possibly, look out for experienced fund managers who specialise in dealing with small-cap funds.
Besides, the investment horizon should be long, which may be seven-10 years ideally. Also, evaluate the liquidity score of the small-cap fund, which is calculated by Crisil. The liquidity score for small-cap funds is generally 25 days. Generally, the lower the liquidity ratio, the better it is.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.