Money making opportunity: Should you go for small-cap mutual fund schemes or not? Find out

Small-cap mutual fund schemes are equity-oriented mutual fund schemes, which have to invest at least 80 per cent of their corpus in small companies. According to SEBI, small companies that are other than the top 250 listed companies in terms of market capitalisation are small-cap companies.  So any scheme which invests and remains invested at least up to 80 per cent of its corpus in these companies are categorised as small-cap funds and they are free to deploy their balance 20 per cent anywhere whether in debt funds or companies from top 250 companies. 

However, the question is what type of investors can go for such small-cap mutual fund investments and what is the risk involved in it? Is there any income tax saving that an investor can avail after investing in small-cap mutual funds?

Speaking on the matter Mumbai-based tax and investment expert Balwant Jain said, "Small-cap stocks typically have the highest growth potential, since the underlying companies are young, and seek to expand aggressively. They are more vulnerable to a business or economic downturn, making them more volatile than large and mid-caps. Investors who are keen to invest in the small-cap space and may not have the time to research but possess the high risk-taking capacity can look to invest in small-cap funds." Jain went on to add that small- cap and mid-cap mutual funds typically outperform large-caps during a bull market, but decline more when the sentiment turns bearish. The choice of a right fund should be in line with the risk appetite, return expectations and investment horizon of the investor.

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Categorising the investor's category and mutual fund investment Kartik Jhaveri, Manager — Wealth Management at Tanscent Consultancy said, "Risk appetite plays a major role in the selection of mutual funds category. Those, who have a high-risk appetite can easily opt for the small-cap mutual funds while for those who can't afford high-risk but want returns better than bank FD, PPF and NPS should avoid small-cap and choose instead large-cap or mid-cap funds. but, here once again their investment goal becomes a factor that must keep in mind while choosing their mutual fund category." Jhaveri went on to add that the risk appetite and ability to take are two different things. They are indeed volatile and risky in the short term, but they have the potential to offer superior returns over a long period.  Small-cap mutual fund schemes are meant for aggressive equity investors who can stomach a lot of volatility and risk.