You must have heard from experienced investors advising you to invest in small cap and mid cap funds, but you should have adequate knowledge of both before you venture to invest in them. The definitions of both types should be carefully absorbed by you before you delve deeper into their finer nuances as well. Mutual funds which diversify their capital investments between small and mid cap companies are known as small cap and mid cap funds respectively. The investment proportion between small cap and mid cap funds may vary from one fund to another. These are basically funds which invest in a mixture of small cap and mid cap company stocks. Owing to their high beta stock exposure, they are usually positioned at a higher trade-off fulcrum between returns and risks, in comparison to a large cap fund. Now that you have an idea of what is small cap and mid cap funds, let’s delve deeper into it.
What is mid cap fund?
From a DSP midcap fund to other types, you should carefully know what they basically stand for. Mid cap funds are those funds which are slotted between small cap funds and large cap funds with regard to the size of the company. Whenever there is any bull run in the market, these mid cap stocks are expected to substantially surpass the performance of their counterparts in the large cap space since these organizations always look at expansion opportunities.
They keep trying to tap relevant growth opportunities in the bargain. Investors should always note however that underlying stocks have higher volatility levels in comparison to large cap peers. Mutual funds that majorly deploy their investments in mid cap companies are classified as mid cap funds and this is the accepted definition that you need to know. Through careful selection of stocks, sector-wise diversification and timing the market properly, managers of funds can certainly earn superlative returns. Equity funds in the midcap category are suitable for those investors who have a higher appetite for risks in comparison to their large cap investment peers. Always invest in such schemes only if you are looking for a higher appreciation of invested capital with sufficiently higher market risks.
What is small cap fund?
From the popular SBI small cap mutual fund to many other similar products in the market, these funds invest majorly in stocks of companies with smaller market capitalizations. Interestingly, they come with the highest potential for growth according to industry experts. This is because most of these underlying entities are younger and have more aggressive plans for expansion. They are however more vulnerable when it comes to economic or business fluctuations, volatility and downturns as compared to large and mid cap companies. Those willing to invest in small cap funds should have a higher ability to take risks in comparison to other investments in the mutual fund space.
Mid cap and small cap funds usually surpass the performance of large cap funds whenever the market is sufficiently bullish as per experts although they may decline at higher levels whenever markets exhibit bearish symptoms. Choosing the right fund is of paramount importance in this regard and the choice should only be made on the basis of your future investment goals, investment duration/time-frame that is suitable for you and your expectations with regard to the returns. Most importantly, your tolerance/appetite for risks is the determining factor here. Small cap funds are hence those funds investing in companies with market cap lower than Rs. 500 crore as an average rule of thumb. These funds may usually have exposure to smaller company stocks between 65-90% on average. Of course, small cap stocks will give you an advantage over institutional investors who purchase large cap company stocks instead of their relative stability.
If you are looking to earn aggressive returns, nothing beats investments in small cap funds although the risk levels are considerably higher in the bargain. The composition of the fund should play a big role in your decision and taking decisions impulsively can cost you in the long run. Always spread out and diversify your investments throughout multiple funds so that you have a wide range of mid and small cap funds in your investment basket. Always set a benchmark against which you can have your returns compared. Comparing against any such benchmark will help you understand actual fund or portfolio performance in an accurate manner. The best way to lower risks may be investing via SIPs or systematic investment plans. This helps you reduce the risk of market volatility arising from investing a big sum of money at one go while also helping you benefit from cost averaging and compounding.
Some other vital aspects to keep in mind
As experts say, patience is the key towards successfully garnering returns from your investments in small and mid cap funds. Compounding will get you sizable wealth creation over the years but you should not be fishing for spectacular short term gains since these may not always be feasible and carry more risks than necessary. Steer clear of investing a lump sum amount and stick to your SIPs in a more disciplined manner. Risks are spread out and diversified through SIPs and you should keep in mind the NAV (net asset value) of the fund that you are investing in.
Remember that this will change on the basis of market movements and underlying benchmark fluctuations. Small cap or mid cap funds may be impacted more than their large cap peers during market downturns since many companies are still to establish themselves in the manner of large corporations and may exit markets altogether. Yet, this is a great avenue for investments if you have a higher appetite for risks and are seeking growth in an aggressive manner. Have your financial goals laid out clearly, check the investment costs, performance of the fund over a sustained duration and the reputation of the fund house/manager before investing.