Consider these factors before investing in smallcap funds

A renewed interest in small-cap companies has awakened investors after a three-year slumber. Since March 2020 lows, the value of many small-cap enterprises has more than doubled because of low-interest rates and a vigorous government and regulatory effort to stimulate the economy. The comeback of smallcap companies has been boosted by a rise in retail spending since June 2020. The comeback of smallcap companies has been boosted by a rise in retail spending since June 2020. As per the financial experts, the debt levels across small caps have become more manageable. Low debt/ equity levels provide these companies with better resilience in a down cycle and participate in the upcycle.

Having said that, small-cap stocks’ risk and volatility cannot be removed entirely. The mutual fund strategy is the best way to invest in small caps for most retail investors.

According to the value research, equities smallcap fund has provided returns of 90.27 percent (absolute return) for a year and 27.44 percent (annualised return), and 16.90% (annualised return) over three and five years as of October 21, 2021 (value research data). Before investing in smallcap funds, keep the following things in mind.

The investment strategy of the fund manager

The philosophy, stock selection approach, and asset allocation of an investment manager should all be considered when making an investment decision. When investing in small-cap funds, make sure the portfolio’s goals match yours and your risk tolerance.

Recognising the time horizon for investments

After an initial investment period of three to five years, a mutual fund can start generating returns. A dedicated and disciplined investment period of seven to ten years, on the other hand, enables to achieve substantially larger returns and recover any losses.

Risk allocation

A frequent risk assessment of these funds should be conducted by investors, not only in terms of equities assets but also in terms of the entire portfolio as well you can reduce the risk and volatility associated with small-cap investments by utilising the expertise of a financial advisor.

If you’re looking for a fund manager, look for an Asset Management Company (AMC) with a track record of finding and managing risk well. Choose funds that have been around for at least six to ten years. Funds that have outperformed the benchmark index during both market booms and busts are the best to invest in.

Fund houses publish monthly factsheets that detail the performance of each fund. When investing, look at the price-to-equity ratio to gauge the fund’s growth potential.