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Investing in a systematic manner with a good small cap mutual fund is the best approach to maximize wealth in the long period.
As per the recent guidelines of the SEBI (Securities Exchange Board of India), the watchdog of Indian securities market, small cap funds are defined as those funds which invests a minimum 65% of the total assets in small cap companies. All the companies beyond top 250 in terms of full market capitalization fall within the purview of the definition of small cap companies.
What are Benefits of Investing in Small Cap Funds ?
- High risk, high return
- Suitable for aggressive investors
- Reduces risk through diversification
- Helps in creating huge wealth over a period of time (time period required is 10 years or more)
Who Should Invest In Small Cap Funds ?
Small cap funds invest most of its assets in buying stocks of small companies which are very volatile and can be risky bets in the short term. Hence, these schemes are suitable for only those aggressive investors who can digest volatility and avoid sleepless nights at times when these funds fall or do not perform during a particular period.
These funds usually fall the most during market turmoil, however during bull market, these funds have the potential of generating extraordinary returns than any other category of mutual funds or asset class.
What Should Be The Right Strategy of Investing in Small Cap Funds ?
It would not be a wise idea to avoid the best return generator category as these schemes can turn out to be very fruitful in the long term. Hence, one should allocate at least some portion of their assets towards these funds.
However, one should remember that they have to invest for long term say for at least 10 years in order to get the best results out of these funds. That's not to say that a person who is aggressive and has a long time horizon should put all his assets in this risky category.
These funds are capable of giving the much required boost to your wealth in the long term. Hence one should always have a little exposure in these kinds of fund as per your risk appetite.