What are small-cap and mid-cap funds? Are they a good investment option?
Investing in mutual funds is a great way to grow your money over time. Among the different types of mutual funds, small-cap and mid-cap funds are ideal for those looking for high returns over a long period. These funds are more suitable for people who are okay with taking higher risks and can stay invested for more than 7 to 10 years. Small-cap and mid-cap funds are mutual funds that invest in companies based on their size, measured by market capitalisation (the total value of a company’s shares).
Let’s understand these funds and whether they are right for you.
Small-cap funds invest in companies that are in the early stages of growth. According to SEBI, these companies are not among the top 250 in India by market size. While these businesses are small now, they can grow significantly. Mid-cap funds invest in companies ranked between 101st and 250th by market size in India. These mid-sized companies are generally more stable than small-cap companies but still have room to grow. Small and mid-cap funds offer higher growth potential than large-cap funds (which invest in big, well-established companies).
However, they are also more unpredictable and riskier.
Some examples include the Bandhan Small Cap Fund, Canara Robeco Small Cap Fund, Canara Robeco Mid Cap Fund, Edelweiss Mid Cap Fund, Edelweiss Small Cap Fund and Mahindra Manulife Mid Cap Fund.
Advantages of Investing in Small-Cap and Mid-Cap Funds
- Growth Potential: Both small-cap and mid-cap funds have high growth potential. Small-cap companies can grow quickly if they perform well, sometimes offering higher returns than large, established ones. Mid-cap companies also offer substantial growth opportunities but at a more stable pace.
- Volatility and Risk: Small-cap funds are the riskiest because the companies are new or smaller and can be more affected by market changes. Mid-cap funds are less risky than small-cap funds but still more volatile than large-cap funds (which invest in more prominent companies). Therefore, these funds are best for investors who can handle market ups and downs.
- High Returns: These funds have delivered impressive returns recently. For instance, the average return for these funds over the past 10 years has been over 13% annually (as of December 2024).
- Professional Expertise: Investing in these funds means you benefit from the skills of experienced fund managers who pick the best stocks for you.
- Investment Horizon: Investors should stay invested for 7-10 years to manage the risk and benefit from the growth. Patience is key to making the most of these investments
Disadvantages of Investing in Small-Cap and Mid-Cap Funds
- High Risk: These funds are more volatile and can fluctuate significantly depending on market conditions. For example, in 2018, the average return for small-cap funds was -17.25%, compared to 1.64% for large-cap funds.
- Unpredictable Growth: The future of small and mid-cap companies can be uncertain. Some companies may grow rapidly, while others might struggle or even go bankrupt.
- Impact of Interest Rates: Changes in interest rates can affect the growth of small and mid-cap companies, as they often rely on loans to expand. Large-cap companies are less affected by such changes.
Our Opinion:
Small-cap and mid-cap funds have recently outperformed the Sensex, offering attractive opportunities for long-term investors. However, these funds are best suited for people with long-term goals (7 years or more) who can handle the market’s ups and downs. Investing in small-cap and mid-cap funds can be a great choice if you are willing to take some risk for potentially higher returns. Select funds with a good track record and consult a professional financial advisor or mutual fund distributor to guide you.
In conclusion, small-cap and mid-cap funds are excellent for long-term growth but require patience and the right strategy to reap the rewards.
When you decide to invest in mutual funds, it can feel overwhelming. With so many options and terms to understand, it’s easy to get confused. That’s where a mutual fund distributor or advisor comes in. They are experts who help guide you through the world of investment funds.
A mutual fund distributor is a person or a company that helps you buy and sell mutual funds. Think of them as a guide who helps you make the best choices for your financial goals. They provide information about which mutual funds might be the right fit for you, based on your age, income, and what you want to achieve in the future, like saving for education, buying a house, or retiring.
