7 Things to Remember Before Investing in a Small Cap Fund
Before you invest in a small-cap fund, you must overview a few facts about it. A small-cap fund is designed to give better returns on your investment in a long term. For the last few years, this category of mutual funds has performed exceptionally well. Here, while mentioning long term, it clearly indicates a tenure for 10 years or more. A small-cap outperforms a large-cap over a longer horizon.
If you are willing to create wealth in a long term, then you can surely opt for a small-cap fund but if your objective is short termed, it can be a volatile product to pick. In this case, the investors are suggested to follow the asset allocation strategy, as small-cap companies offer investors more room for growth but with higher risks and volatility.
You must keep the following factors in mind before investing in the small-cap funds:
In case of a small-cap fund, it has been observed that smaller companies take longer to perform superior performance. It takes three to four years to show the growth in investment. For the same reason, the investors must invest for a longer period of time in such schemes.
It becomes important that before investing in a small-cap fund, you must check for its performance over a period of 5 - 10 years. The funds that outperform their respective benchmark and category during the bull and bear phases must be preferred for investment.
Small-cap companies are usually prone to higher risks, and just because a fund has performed pretty well in the last few years, does not makes it any less volatile. It may increase the risk if the patterns do not follow the rise in prices. Investors are suggested to analyze the fund carefully before making an investment as it may tend to remain volatile.
The investors should keep track of the performance and quality of the fund. Losing track of the investment can wipe-out a significant portion of the invested capital.
The trust of the investor in the investment philosophy of the fund that he invests in plays a vital role in the entire investment cycle. This is because the investment philosophy has to be in-line with the objective of the investor. It is an important aspect as during the periods of high volatility, an investor might lose his patience and he might not stay invested and would miss upon the long-term benefits of the small-cap fund.
While investing in a small-cap fund, an investor should be clear about his investment goals and risk appetite; as these are the two factors which strongly influence the decision of an investor.
A small-cap fund can undergo a substantial regression if the market starts to fall downwards. So, in order to allow the fund to generate returns in-line with the expectations, an investor should stay invested for a long term. A long-term horizon is usually considered to be a horizon of 8-10 years.
Last but not least, we all know that small-cap funds offer lucrative investment opportunities to investors. However, investing in such highly risky and volatile schemes is not every investor’s cup of tea. We hope after reading this blog, you’ll be able to invest in a better way. For any assistance in this regards, connect with our experts as per your convenience.
MySIPonline can be your one-stop solution for investing in small-cap funds. We offer free consultancy for your every investment, such that your investment never gets wasted and you achieve your expected goal. We guide you at every step and never mislead you or offer you a biased investment suggestion. We will be looking forward to hearing about your investment plans.
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