What are small cap funds? - By: Swarali Chavan
Small cap is a term which is used to classify companies with relatively small market capitalization. The company’s market capitalization is the market value of its outstanding shares. The meaning of small cap funds may differ between brokerages. The advantage of investing in small cap funds is the opportunity to beat institutional investors. Small cap funds have historically outperformed large cap funds. One of the most significant benefits of investing in small cap funds is the opportunity to beat institutional investors. Because mutual funds have restrictions which limit them from buying large portions of any one issuer’s outstanding shares, some mutual funds would not be able to give the small cap funds a meaningful position in the fund. The fund would usually have to file with the SEC to overcome these limitations. If a fund does this, it means tipping its hand and inflating the attractive price.
If the investor has a huge investment horizon only then should an investor plan to invest in small cap funds. An investor should have the patience of 3-5 years to allow the fund to gain from one complete run. Small cap funds witness frequent changes in the market. These funds are good for a small part of the portfolio. There are a lot of companies in the small cap funds which can become successful. After an investor has understood what is small cap funds, they can start investing in them. A unique business model goes well for the company in the long run. If the small cap company is present in the place with deep pockets is it likely that it will close up eventually. An investor can also use an investment app for investing in small cap funds.
Advantages of small cap funds:
1. Small cap funds have a good exponential growth potential and provide high returns on investment if the right stocks are picked from the small cap segment.
2. Small cap stocks also provide a good room for diversification in fund’s portfolio as during the investing period it often happens when large caps do not perform well and small cap stocks grow fast.
3. They are underfollowed in stock market and are usually untapped by institutional investors which give a huge opportunity to wise investors to grow their investment quickly.
4. These small companies tend to be more flexible than large companies and hence can also adapt to changes more easily and quickly.
Investors who have the capacity to take high risks can consider investing in this category. An investor must have a small composition allocated in their portfolio towards small cap funds. When an investor creates a stock portfolio for himself, it is important to have a benchmark against which they can compare their returns.
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swarali Chavan is a finance professor. In her free time, she reads upon and studies about market investment instruments. She has spent considerable time researching onsmall cap funds. In this article, she has explained what are small cap funds all about.