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Introduction to Small-cap Mutual Funds
Such companies are those which are new in the business and have huge potential for growth. Hence, investors can generate exceptional returns from these funds. However, the downside risk is also very high. This article will enlighten you about all aspects of Small-cap Funds. In this article, you will understand what is a Small-cap Fund, its different features and advantages, and other aspects which you need to be aware of before you invest in any Small-cap Fund.
What is a Small-cap Mutual Fund
A Small-cap Mutual Fund is an investment vehicle that invests in equity and equity-related instruments of Small-cap companies. Here, the Small-cap definition is for companies that rank 251st and onwards as per the market capitalization. Market capitalization as you may know is one of the most important factors of choosing schemes for investments.
Features of Small-cap Funds
The features of Small-cap Mutual Funds include –
- High growth prospect: The growth prospect of Small-cap companies is high as they are in their nascent stage. They possess the ability to grow into large firms that gain fame. They have a small customer base at present which can grow as these companies provide in-demand products and services in addition to improving their quality. So, with time, these companies can grow exponentially if the customers like their products/ services. If the companies grow, then the return on investment in the stocks of these companies would automatically grow. Thus you can earn great returns from Small-cap Funds which invest in these companies.
- Risky investment: There exists a possibility that they can face issues and mistakes can happen. If such a thing happens, then there is a possibility that the company may have to shut down. So, the risk is high while investing in Small-cap Funds as Small-cap companies are not financially stable. They are growing and at this stage, anything can happen, it can beat the market or could bewound-up due to losses.
How do Small-cap Funds Work
As per SEBI, Small-cap Funds need to invest a minimum of 65% of their AUM in Small-cap stocks only. The remaining can be invested as per the market and the observation and analysis of the fund manager. Small-cap Funds can help in wealth accumulation in the long term. As these are growing companies, the return can be exponential if you invest for a longer duration.
Who Should Invest in Small-cap Funds
Investors who are willing to take the risk to earn higher returns can invest in these funds. Also, such investors must invest for a longer duration, at least 5 years or more to reap the ultimate benefit of investing in Small-cap Funds. These funds are not for risk-averse investors.
Things Investors Should Consider Before Investing in Small-cap Funds
There are mainly four things that you need to consider when investing in Small-cap Funds and they are:
- Cost of investment: When you invest in a Small-cap Mutual Fund, you need to check the expense ratio. This is the cost of investment. The expense ratio can be defined as the service charge of the fund house. They would charge you the same when you withdraw the fund amount. Now, the lower the expense ratio, the higher would be your profit.
- Risk: When you are investing in Small-cap Funds, you need to know these are more volatile and carry higher risk as compared to Small-cap and Mid-cap investments. If you do not have the risk appetite for the same, you can opt for other less risky instruments.
- Return: The returns are generally high, so if you are willing to take the risk, you can earn exponential returns.
- Investment goal: Finally, the most important factor to consider is your investment goal. You need to check the tenure for which you can invest, how much you can invest, what is the amount you want to accumulate, and other emergency factors before you invest.
What is the Minimum Amount you Need to Invest
The minimum amount can be anything equal and above Rs. 100 if you are investing via Systematic Investment Plan (SIP). However, if you are going for a lump sum investment, then it depends on the scheme you are choosing. Every scheme has different minimum investment amount criteria.
The range of minimum investment varies from Rs. 100 to even Rs. 5,000.
Tax Implications on Small-cap Funds
If you redeem your investment in a Small-cap Fund before completing 12 months from the date of purchase, then your profits will be categorized as short-term capital gains and will be taxed at a flat rate of 15%.
On the other hand, if you’re taking profits after one year from the date of purchase, your profits will fall under long-term capital gains. In a financial year, if your long-term capital gains do not exceed Rs. 1 Lakh, then you’re eligible to get a tax exemption, and if it exceeds that, then the excess amount will be taxed at 10% without indexation.
Suppose you made a long-term capital gain of Rs. 1.50 Lakhs from an Equity Mutual Fund in a financial year. Here, Rs. 1 Lakh will be exempted from income tax and the remaining Rs. 50,000 will be taxed at 10%.
How can you Invest in Small-cap Funds Through Nivesh
Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:
- Create an account in Nivesh by providing your basic KYC details. (If you already have an account then just login into your account)
- On your portfolio page click on the Buy New tab at the right top corner of the screen.
- Select the category and choose the funds you want to purchase.
- If you already know the name of the fund to buy, then you can search the particular fund through Quick Order.
- Fill the transaction details and confirm. You can place up to 5 orders in one go.
- You can make payment through your registered account through UPI, Direct Pay, or NEFT/ RTGS , Bank Mandate or Cheque. For same-day NAV, select UPI, Direct Pay or NEFT / RTGS as other payment options may take a few days to clear, Nodal account takes about 1-2 days to clear payment from the approved mandate and cheque takes about 2-5 days in clearing due to which you will not get the same-day NAV.
Frequently Asked Questions (FAQs):
1. Are Small-cap Funds Risk-Free?
The risk is high but it is safe, provided you thoroughly analyze the scheme, and research about the fund house and the fund manager handling the fund.
2. What is the Minimum Amount to Invest in Small-cap Funds?
The minimum amount can be Rs. 100 also if you invest using a SIP. However, it depends on the scheme you are choosing.
3. How Long Should you Invest in Small-cap Funds?
Usually, it is suggested that a minimum of 5 years is required for Small-cap Funds to provide you the profit you anticipated. Though the time span varies from one investor to another.
4. Can we Redeem Small-cap Funds Anytime?
Yes, there is no lock-in period for any Small-cap Funds. You can withdraw any amount from the fund at any point in time after accounting for exit load if applicable.
5. Is There any Tax on Small-cap Funds?
Yes, you need to pay the capital gain taxes on the profits made from the funds. If you stay invested for one year and above, then you need to pay long-term capital gain tax or else, short-term capital gain tax.
