Best Mutual Fund Small Cap

What Are Small Cap Mutual Funds?

Small Cap Mutual Funds are those funds that invest their corpus in the shares of small companies. These are mostly unheard companies with small market capitalization. As per the Securities and Exchange Board of India (SEBI), small-cap companies are those that are ranked below 250 on the stock exchanges and have a market capitalization of less than Rs. 5,000 crores.

Features of Small Cap Mutual Funds

Below are the salient features of small cap mutual funds:

• As per the SEBI guidelines, small cap funds must invest a minimum of 65% of their corpus in the stocks of small-cap companies

• Small cap funds have the potential to generate very high returns. The top small cap mutual funds can perform even better than any other equity fund in the long term

Who Should Invest Insmall Cap Fund?

Small cap mutual funds entail higher risks as compared to mid-cap and large-cap mutual funds. It’s because these funds invest a major portion of their corpus in small companies with no proven track records. Events like organizational instability or bearish market conditions can impact the returns generated by these funds severely.

At the same time, it’s crucial to note that these small companies can grow rapidly if provided with a favorable environment. During bullish markets, small cap mutual funds can generate very high returns and can outperform other equity-oriented funds.

Hence, if you are ready to take high risks to gain double-digit returns on your investments, you can invest in the best small cap mutual funds. However, before you invest, here are a few factors you should consider:

• Investment Objective

  You should carefully evaluate your investment objective before investing your hard-earned money. Like other equity funds, small cap funds work best when you can stay invested in them for at least five years or more. So, if you’re looking to invest for your long-term financial goals, small cap mutual funds are a good option.
  

• Past Performance

  Although the past performance of a fund doesn’t guarantee future returns, it can give you an idea of the estimated returns that you can generate. Hence, you should always look at the historical performance of a small cap mutual fund before investing in it.
  

• Fund Manager’s Experience

  The fund manager plays a vital role in a mutual fund’s performance. The decisions taken by a fund manager sometimes directly impact the returns generated by a mutual fund. Hence, you should observe the fund manager’s experience and previous performance before investing in a small cap mutual fund.

Taxation on Small-Cap Funds

• Since small cap funds are equity-oriented, returns from them are taxed just like any other equity mutual fund. Two types of taxes are applicable on profits generated from small cap mutual funds -Dividend Distribution Tax (DDT) and Capital Gains Tax. 

• Dividend Distribution Tax

   

  If you’re receiving dividends on your small cap funds, a Dividend Distribution Tax or DDT of 10% will apply to them. The Asset Management Company (AMC) will deduct this tax before paying the dividend amount to you. Until 2020, dividends were tax-free in the hands of investors and the DDT was payable by companies.

   

• Capital Gains Tax

   

  If the small cap funds are held by you for less than a year, gains from them are classified as Short-Term Capital Gains (STCG) and are taxed at a 15% rate. However, if you have held your small cap mutual funds for one year or more, gains from them will be classified as Long-Term Capital Gains (LTCG), and they will be taxed at a 10% rate without any indexation benefits. LTCG gains up to Rs. 1 lakh are tax-free.

Advantages of Investing in Best Small Cap Fund

Below are the advantages of investing in the best small cap mutual funds:

• High Returns

  Small-cap mutual funds invest a major portion of their corpus in small companies that have high growth potential. That is why these funds can generate very high returns in the long term and can even outperform other equity-oriented funds. However, you must stay invested in them for at least five to ten years. 
  

• Portfolio Diversification

  Small cap mutual funds are a very good option for the diversification of your investment portfolio. You can invest in a mix of large-cap, mid-cap, and small-cap funds to spread out the risks in your portfolio and also allow yourself an opportunity to make very high returns. Even if the small-cap funds in your portfolio fail to perform as expected, your overall portfolio won’t incur many losses.
  

• Low liquidity

  Small cap mutual funds invest in companies that are not regularly traded on the stock markets. But once these companies start doing well and their revenues are made visible to the public, their share prices rise rapidly. And subsequently, small-cap funds suddenly start providing massive returns. 
  

How to Invest in Small-Cap Funds?

You can invest in small cap mutual funds online. With Tata Capital’s Moneyfy platform, you can seamlessly invest in the best small-cap funds from the comfort of your home or office. All that you have to do is create your investor account, complete your e-KYC, and start investing!