7 Points to Ponder While Investing in Small Cap Funds
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It’s a common tendency of many investors to go for the most lucrative returns whenever investment in mutual funds is concerned. Small-cap funds provide remarkable returns, and hence they attract a majority of investors, but at the same time, many investors who understand the nature of risk & its outcome on the scale of negative returns are afraid to touch small caps due to their high-risk portfolio.
Escaping from it will keep you forbidden from the high yields it can provide, and indulging without proficiency can hit your toes. There are specific points which the investors need to know before investing in small-cap funds to enjoy this roller-coaster ride and take benefit from all its perks.
Understand the Concept
Small-cap funds are the equity-based mutual funds which invest their corpus in the equity instruments of small and emerging companies. These companies have a high margin of growth as they have a plethora of opportunities to grow in the future, and hence they can generate exceptional returns. These companies are generally new in the market; therefore, they lack the experience and financial strength to survive the bear market and can face heavy downfalls.
Aggressive Nature of the Investors
Here, the aggressive nature demonstrates the attitude of the investor towards the investment style, where the investment style should be aggressive and aim to achieve high returns in the market while ignoring the negative period which usually occur for a short run. Such kind of investors focuses on the high-end capital growth and is least concerned about the safety of the principal amount. Small-cap funds are the best suitable option for this kind of investors; therefore one should possess the same nature of investing.
Tenure and Age Factor
The investor should assume that the time horizon for the investment should be at least five years and the returns sometimes can even take more time to become fruitful. Hence, the investors in old-age should avoid investing in the small-cap funds. The recommended age for investing in the small-cap fund is below 45.
Risk Appetite
The risk factor involved in the small-cap fund can be very high, and the investor should be psychologically ready for bearing high risks. In worst conditions, the fund can even possess a chance of 20-25%. The investor should be patient enough to hold on for a long-term as the returns in the long-term are most probably bountiful.
Fund Research
It is an essential aspect regarding any mutual fund investment. The fund should be briefly analyzed on your own or with the assistance of an expert. Since the small-cap funds are extremely volatile and can provide very high returns, it gets even more important to check the suitability of your financial goal with the scheme.
Discipline
Small-cap funds are for disciplined investors who can hold their investment for a long-term even when the market is not performing good. The placement and redemption should be precise and according to the goals of the investor. Investing to seek colossal returns without setting a goal is not appreciable.
Mode of Investment
The style of investment plays a vital role in small-cap funds. The SIP mode of investment is considered a better option because it minimizes the risk factor due to rupee-cost averaging. The lumpsum investment is only advisable when the NAV has fallen and can provide good returns in the future. Investors should take the assistance of an expert in this case.
On a final note, small-cap funds can be a blessing for some investors and a nightmare if conventional aids are not taken before investing. To enjoy the surfeit wealth creation through small-cap mutual funds and know about all the other details regarding investment, watch the explanatory video on small-cap funds at https://www.youtube.com/watch?v=h85pd3X9sA4 or reach out for our financial experts who are delighted to assist you anytime regarding mutual fund investments.
