Small-Cap companies: One of the best capital investment plan
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Small-cap companies are not defined in any way. There are, however, some widely accepted definitions of small-cap companies. A company with a market capitalization of less than Rs.5,000 crore is typically classified as a small-cap. Small-cap funds are funds dedicated to investing in such SBI small-cap fund companies.
However, in its mutual fund classification logic, SEBI has provided a ranking-based definition of small-cap funds. According to the new definition, which goes into effect in 2018, all stocks will be indexed descending on market capitalization. Large-cap stocks will be defined as the top 100 stocks. A small-cap fund is required to invest at least 85 percent of its corpus in these small-cap stocks.
Small-cap funds invest in the stocks of small-cap companies. These funds must invest at least 65 percent of their funds in small-cap companies, which typically have high growth potential because they are young and have a strong outlook for aggressive expansion. On the downside, they are more volatile than their mid-and large-cap counterparts, as these funds can generate sharply negative returns during times of market volatility, and the chances of an investor losing his capital in small-cap companies are high.
- The primary benefit of investing in small-cap funds is the significant upside growth potential, which is unrivaled by bluechip companies with a large market capitalization in large-cap funds.
- Exposure to small-cap funds can help boost portfolio returns because these funds tend to reward long-term investors.
- Because these small-cap companies are relatively new and unknown, there is a chance that they are undervalued and therefore available at a discount.
- During a bull run, they tend to outperform large-cap and mid-cap funds, giving you a huge opportunity to grow your investments quickly and earn superior returns.
These are some of the benefits of small-cap funds.
- How to evaluate small-cap funds:
Risk Assessment of a Fund
- The risk of investing in mutual funds primarily refers to the possibility of receiving returns that differ from what you expected. Risk, in other words, denotes the volatility of returns. However, these dangers are not shared by all mutual fund schemes. The relationship between return and risk varies depending on several factors. Some basic risk measures that are commonly used to evaluate mutual funds include alpha, beta, r-squared, and standard deviation. They aid in determining the level of risk associated with various schemes.
- Returns on risk-adjusted investments
Returns should be risk-adjusted because small-cap funds are risky, but some funds can manage risk better than others. Sharpe ratios, Sortino ratios, Information ratios, and other ratios are used to identify funds with the potential to generate high returns with low volatility.
- The Fund Manager’s Expertise
The expertise and skill set with which a fund manager manages a fund has a significant impact on its long-term performance and portfolio. You should look for a fund manager who has a proven track record of success in market ups and downs, as well as investment experience.
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