The Mid-cap and Small-cap funds denote the size of companies these funds invest in; wherein cap is nothing but market capitalization of the company. Small cap funds are basically funds, which invest in companies that are in the early stages of development.
2. Meaning of Mid & Small Cap Funds
- As per new SEBI definition, small cap companies which are not in top 250 companies in India (in terms of market cap). Small Cap Funds have to invest minimum 65% of their total assets in such Small cap companies.
- Mid cap companies define as top 101st to 250th companies in India (in terms of market cap). Mid Cap Funds have to invest minimum 65% of their total assets in such Mid cap companies.
3. Key Features of Mid & Small Cap Funds
While small and mid-caps have higher growth potential than large caps, such companies are more volatile and hence risky. However, quality small & mid-caps can prove to be efficient long-term investments.
Examples of Small & Mid Cap Funds: Franklin India Prima Fund, Sundaram Small Cap Fund, L&T Mid-Cap Fund
There are no doubt that Small and Mid-Cap funds are one of the riskiest Mutual Funds, but then with higher risk come higher returns. Let’s find advantages and disadvantages of investing in such funds for you.
4. Pros & Cons of Mid & Small Cap Funds
a. Pros of Small & Mid Cap Funds
- Good Returns in last few years: Small and mid-cap funds have given amazing returns in last few years. Last 10 years’ average returns of such funds are more than 15% p.a.
- Higher Growth potential: Though these funds invest into companies having lesser market cap than large cap companies, these small companies have the potential to be future large cap companies and hence can generate higher returns. Skill is to identify the right ones.
- Higher dependence on expertise: It is all about picking the right stock to make bountiful returns in Small and Mid-cap market. So, mutual funds do that for you by using the best talent in the industry.
- Higher Chances of quick growth: Small cap funds have more chances to provide the diversification of mutual fund’s portfolio because many times it happen when large cap funds not able to perform well than small cap stock grow quickly.
b. Cons of Small & Mid Cap Funds
- Uncertainity of getting dividends: As small cap companies need to invest much of their profits in their growth, the option of getting dividends are uncertain.
- Unpredictable future: Though there is room for growth, future of small and mid-cap companies is unpredictable and uncertain too depending upon market conditions.
- Highly volatile: As these funds invest in small and mid-cap companies, they are very volatile. There is also a higher risk of company becoming bankrupt as compared with large cap companies. Example – As on 1st July 2018, last 6 months return of average Small Cap Fund is -15% whereas it is +0.5% for large caps.
- Interest Rate effect: Small & Mid cap companies’ growth is also dependent on interest rate scenario. So, any change in interest rate impacts their loan sheets, which can spur or reduce growth based on the direction of the interest rate movement. This impact is negligible in large caps due to their very high revenue size.
- Higher Risk: These funds success depends on the time invested by mutual fund house in analysis and catching the right stocks in small-cap segment. So, selection of right fund house with shrewd fund manager is the key.