Since, small cap mutual funds give high growth potential, companies in their early stage of development, have great scope of higher developments. Small cap companies include the startups or firms that are in their early stage of development with small revenues. Many successful small cap firms have eventually grown into large cap companies. HDFC Small Cap Fund, SBI Small Cap Fund, Franklin Indian Small Cap Fund, etc., are some of the best small cap funds to invest in 2017. The small size of small cap companies presents investors with a choice of balancing more risk with the potential for significant growth.
PROS: SMALL CAP MUTUAL FUNDS
- Small cap stocks are priced lower than mid cap and large cap stocks.
- Small cap stocks give high growth potential. Since these are the companies at their early stage of development, they have great scope of higher developments.
- Small cap funds help to diversify your portfolio. A trader can trade in a number of stocks as compared to the other caps.
- At times, small cap funds tend to perform better than the large cap funds. As large companies incline towards stability, small caps can sometimes give it a better chance of performing better.
CONS: SMALL CAP MUTUAL FUNDS
- Small cap stocks are riskier as they tend to have a low lasting business. For example, a company might have a unique service/product, but may not have enough finance to market it. So, sometimes lack of funding fails a business
- Small Cap stocks are more volatile in nature than large cap stocks.
- Due to their nature of stocks, small caps can outperform in a rising market and even can under-perform during a downturn.
When it comes to small or mid-cap mutual funds, Patience is a big virtue, especially in case of small and microcap stocks. It has been observed that it takes three to four years for these companies to show superior performance. It is essential that investors should have a long-term horizon in mind if they are to invest in these stocks. Small and microcaps are fraught with higher risk and just because the price have linearly risen for the few years does not make the category less risky. Therefore risk assessment is must.