Small cap mutual funds might sound complex, but they are not rocket science! As the name suggests, these funds invest in small cap companies that are not as famous as the big ones you hear about every day. Let us simplify it better to understand.
What is a Small Cap Mutual Fund?
Small cap funds invest in small cap companies particularly with market cap less than Rs 5,000 crores. These companies are not in the top 250, so you might not have heard much about them. While they can bring in great profits, they can also be a bit like roller coasters – exciting but with some bumps!
How Do Small Cap Funds Work?
Think of small cap funds like detectives looking for hidden gems. As per SEBI (Securities and Exchange Board of India), these funds invest at least 65% of their assets (corpus/money) in stocks of small companies. Small-cap companies are just smaller fish in the stock market compared to the big whales in the top 250 companies. But, beware! These funds can be a bit like wild horses because small companies can go through a lot of ups and downs.
Early Bird Benefits: Investing early in companies that could become big in the future.
High Risk, High Reward: These funds are risky, but if things go well, the returns can be impressive.
For the Brave Hearts: Best suited for aggressive investors willing to stick around for at least 7 years.
Who Should Invest in Small Cap Funds?
Long-Term Dreamers: Only jump into small cap funds if you are planning to keep your money there for at least 7 years. Patience is key!
Risk Lovers: These funds are like adventurous rides, so only go for them if you can handle a bit of excitement and risk.
Taxation on Small Cap Funds: Now, let’s talk about taxes. If you decide to sell your small cap fund units, how much tax you pay depends on how long you kept them. It’s like selling a valuable collectible.
Short-Term Gains (Less than 1 year): Taxed at 15%. So, if you sell within a year, some of your profit goes to taxes.
Long-Term Gains (More than 1 year): The first Rs. 1 lakh is tax-free! But if you make more than Rs. 1 lakh profit, 10% of the extra goes to taxes.
Top Mutual Funds in India:
Data is as on three-year period ended Jan 15, 2024
Data is as on five-year period ended Jan 15,2024
| Scheme Name | 3-Year (in %) | 5-year (in %) |
| Quant Small Cap Fund-Regular Plan | 44.02 | 33.52 |
| Bank of India Small Cap Fund – Regular Plan | 32.13 | 30.79 |
| Nippon India Small Cap Fund | 39.26 | 29.06 |
| ICICI Prudential Smallcap Fund | 31.77 | 26.9 |
Conclusion:
Small cap mutual funds are like adventurous journeys. They can be thrilling, but they are not for everyone. If you are ready to take a bit of risk and be patient for at least 7 years, then these funds might be your ticket to potential high returns.
FAQs
Q1) What is the recommended investment duration for Small Cap Mutual Funds?
Small Cap Mutual Funds are equity funds, meaning they invest in company stocks. It is advisable to stay invested for a minimum of 5 years to harness potential benefits.
Q2) Where do small cap funds invest?
According to SEBI regulations, Small Cap Mutual Funds must invest a minimum of 65% in stocks of companies ranked 251 and beyond in India based on market capitalization. While most funds in this category also include allocations to mid-caps, some may have a small percentage invested in large caps. Despite these allocations, these funds tend to be predominantly small cap focused, carrying the associated risk-reward mix.
Q3) What is the risk level associated with small cap mutual funds?
Small Cap Mutual Funds invest in equities, making them potentially volatile in the short term. However, over the long term, the associated risk tends to decrease substantially.
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