Benefits of Small-Cap Mutual Funds
1. Diversification: As the quantum of available small-cap companies is high and the fund is invested in different companies of different sectors like Financing, IT sectors, Hospitality, FMCG, banking, etc. This makes the portfolio diverse and allows better correlation for investors.
2. Tremendous Growth Rate: Small-cap mutual funds have a very big potential to achieve substantial growth rates for their investors. Small-cap Mutual funds have given better returns than large-cap and mid-cap funds.
3. Divided Risk: Under small-cap mutual funds, the investment is made in different industries and not all industries react similarly to market conditions, so even in case, one industry suffers distress, the other industry might remain unaffected by such distress, which somehow balances the risk equation and provides optimal returns.
4. Low Scrip Cost: Small-cap companies don’t have huge valuations, and their individual scrip values are also nominal compared to large cap, which allows investors to acquire more units of the fund and makes your overall holding significant and influential. This is also termed as Net Asset Value (NAV).
5. Undervalued: Many Small-cap stocks are new to the market and are unexplored by investors, hence they are available at a lower price to acquire, which can prove to be a profitable trade for investors as they have substantial growth potential and even in cases where investors can reap the seed if these small-cap companies get merged or acquired by a large cap/ other companies.
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