The rationale behind investing in small cap mutual funds: SBI Small Cap Fund
Broadly speaking, investors are of two types, one who takes risk for higher returns and those who avoid risks and look for average return. If you fall in the first category, then this article is just for you. Small cap mutual funds are for those investors looking for aggressive returns and growth in their investment portfolio. That said, let’s take a closer look at the small-cap mutual funds and check whether sbi small-cap fund ticks all the boxes or not.
What do you mean by small cap mutual funds?
Small cap mutual funds are those which invest a minimum of 65% of its asset in equity and equity-related assets of small-cap stocks, which means the stocks of those companies rank 251st and onwards as per market capitalisation. So, these are growing companies with a lot of potential, but the risk of winding down on a fine morning is also there. Small cap mutual funds are known for their exceptionally higher return generating abilities, and the category average return is around 22.33% yearly.
Who should consider buying these funds and why?
Small cap mutual funds are not for all. You need to understand and evaluate yourself as an investor, and your goals before you pick a small-cap fund. These funds are suitable for aggressive investors who are willing to stay in the market for a long and looking for aggressive higher returns. However, the main thing here is not the return but the risk appetite. The returns from small-cap mutual funds are uncertain, and the price of small-cap funds fluctuates heavily, especially during volatile markets. So, you should invest via SIP and invest in small amounts in small-cap funds. This will help you gain confidence, and eventually, you can accumulate a huge corpus as small-cap fund returns are very high. This will also reduce the risk involved in investing in small-cap funds.
The primary motive for investing in small-cap mutual funds is long-term capital appreciation. If a company has lower market capitalisation, its share prices are low, usually, however, if there is true potential in the company to grow, it has been offering products and services that are having a positive impact on the economy, and there is demand for such goods and services, then these small-cap companies will eventually acquire market share and grow. This will push the share price, and in turn, market capitalisation will increase. In short, your investment of yours will grow. However, it all depends on which small-cap mutual fund you are opting for. One of the best in the market at present is SBI small cap fund offered by SBI Mutual Fund.
Things to keep in mind while investing in small cap mutual funds
If you are investing in small-cap mutual funds like SBI small cap fund, then you should consider the following –
• The earnings from small-cap mutual funds are taxable. As these are equity funds so, 15% short-term capital gain taxes will be applicable on any profit made from the sale of these funds within 1 year of purchase. If you sell after a year of purchase, then 10% long-term capital gain taxes will be applicable on the profit amount exceeding Rs. 1 lakh.
• Secondly, you can invest around 10% to 15% of the equity investments you have into small-cap funds. This is regarded as a safe allocation to beat the risk and optimise
• Finally, you must check the expense ratio. It should be lower so that it doesn’t affect your profits.
Is SBI small-cap mutual fund a good investment?
So, now you know why you should invest in small-cap mutual funds, how much you should allocate, and other intricate details. One of the popular small-cap mutual funds is SBI small cap fund. The fund has been offering an average return of 24.60 per annum, which is higher than the category average.
The fund has 92.2% of its assets in equity and equity-related instruments while 78.8% in small-cap stocks and 13.385 in mid-cap and nothing in large-cap at present. Some of the top holdings are Nifty 50, Elgi Equipments ltd., and Vedant Fashions Ltd. Sheela Foam Ltd. If you check asset allocation by sectors, then it has a significant 15.67% in consumer discretionary followed by 15.2% in capital goods.
The expense ratio of this fund is 0.76% at present, with a 1% exit load. However, the exit load is applicable only if the fund is redeemed within 1 year. At present, the AUM of the fund is Rs/ 12825 crores, and there is no lock-in period. You can start investing in this fund with just Rs. 500 via SIP.
Small-cap mutual funds are great investments if you can stay invested for long enough and let the fund grow and generate those exceptionally returns for you, so with risk appetite, you need quite a lot of patience to invest in these funds.