Small Cap Mutual Funds

What are the features of small-cap funds?

• Minimum 65% allocation in small-cap securities

• Very high risk-return trade-off

• Suitable for investors with a long-term investment horizon

• Invest through SIPs or lump sum

• Earn tax-free returns up to Rs.1 lakh if you stay invested

What is the meaning of market capitalisation?

What should be the investment horizon for small-cap funds?

• Small-cap funds have the highest risk profile in equity funds categorised based on market capitalisation

• They are prone to short-term volatility and negative investment returns

• To avoid short-term volatility, a long-term investment horizon is recommended

• A long-term horizon also helps earn attractive investment returns as small-cap companies grow

• You also get a tax benefit on staying invested for a longer tenure

What is the tax implication of small-cap funds?

• Returns up to Rs.1 lakh are tax-free if you stay invested for 12 or more months

• Returns exceeding Rs.1 lakh are taxed at 10%

• For redemption within 12 months, returns are taxed at 15%

• Dividends earned, if any, are taxed at your income tax slab rate

What are the payout options?

• Dividend option

  Earn dividends on your investment at regular intervals

• Growth option

  Accumulate the returns over the investment tenure and get a lump sum amount on redemption

Who should invest in small-cap funds?

• Investors seeking long-term growth of capital

  Small-cap funds are fairly reactive to market fluctuations. However, they also have a high return potential in the long run. Staying invested can work wonders for small-cap fund investors.

• Investors with high risk appetite

  Since small-cap funds are high-risk funds, they are better suited to investors with a great risk appetite. Seasoned investors rather than novices are usually the ones recommended for these funds.

• Investors who want diversity

  Investors already involved in the market looking for higher risk-return potential can invest a smaller portion of their portfolio in small-cap funds to seek returns while hedging them with other safer investments.