Investing in equity mutual funds is all about choosing the size of businesses to invest in. Very big businesses are regularly in the news for even the uninitiated investor to have heard of them. This may not be true of many businesses that fall in the small-cap segment of the stock markets. Smaller companies tend to have a focused business but have the potential to grow in revenues as well as profit in the long run, compared to many large ones that have a diversified multi-line business. Investors who can stomach risk find investing in small-cap funds as an opportunity to make significant gains.
Small-cap mutual funds, as per the SEBI (Securities and Exchange Board of India) mutual fund classification, are those funds that invest at least 80 per cent of their total assets in small cap companies. According to the SEBI framework, the top 100 stocks by market capitalisation are defined as large-caps; the next 150 are mid-caps; and the rest small-caps. So companies that fall after the 250th position on the list based on market capitalisation are small-cap stocks, which small cap mutual funds predominantly invest in.
Why small cap funds?
Investing in equities is about growth and making profits. Large-cap funds tend to invest in companies that have well diversified business structures than smaller firms. They are less exposed to volatility and swings in their revenues and growth from year-to-year….