Chances are you have seen a few mutual fund advertisements on TV. You may have even heard the terms 'small-cap funds', 'mid-cap funds', and 'large-cap funds'. These mutual funds are categorised by their market cap. Small-, mid-, or large-cap is not the size of the mutual fund. Here ‘cap’ is indicative of the size of the companies in which the mutual fund invests.
(Read more: What is a mutual fund?)
Small-cap mutual funds suffer from high market risk. Any changes in the market will reflect in a change in the fund’s net asset value (NAV). When the market as a whole is not performing well, small-cap funds tend to suffer. In times of market instability, smaller and less-established companies may go out of business. On the other hand, when the market is doing well, small-cap funds have a great ability to produce greater returns than other mutual fund types. If you as an investor have a high risk appetite, you can opt for small-cap funds. (Read more: What is NAV?)
Small-cap mutual funds have done well in recent years in the Indian market. If you can tolerate risk and want investments that show aggressive growth, then small-cap mutual funds are for you. These funds have the potential to give returns of over 100% in a single day.
Small-cap funds face a significant decrease in returns when the market is on a downswing. So, to generate good returns, you should have a long-term investment horizon. This means that your investment should last for seven to 10 years. Historically speaking, small-cap mutual funds deliver higher returns when you have a long-term investment plan.
Small-cap mutual funds invest in companies that have a high potential for generating great returns. So, if your risk-appetite is large, small-cap funds may be ideal for you. It would be a good idea to have some long-term financial goals in mind when investing. Your financial goals could be saving for retirement or paying for your children’s education, and so on.
You earn capital gains upon redeeming units on small-cap mutual funds. Capital gains attract taxation. But the rate of taxation depends on your period of investment in the fund. This is the holding period. Capital gains earned during a holding period of up to 12 months are short-term capital gains. They attract 15% tax. Long-term capital gains are gains earned on a holding period of over 12 months. Long-term capital gains of over Rs 1 lakh have a taxation rate of 10%.
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