Best Small Cap Funds to Invest in 2024?

Small Cap Funds or Small Capitalization Funds in the current scenario hold the hotspot in the Financial market for investors seeking substantial growth. These funds concentrate on smaller market cap companies, offering unique opportunities for those ready to accept a certain risk level in hopes of gaining potentially higher returns. In this blog, we aim to explore the characteristics and possible investment approaches in Small Cap Funds along with the Best Small Cap Funds available in the market for investment purposes.

What basically is a Small Cap Fund?

Small Cap funds are investment vehicles that allocate funds into stocks of small-sized companies. Due to their smaller scale, these companies hold significant potential to expand into larger enterprises, offering lucrative returns to their investors. As a subset of equity funds, these investments are recognized for their high-risk, high-return nature.

Fund managers actively seek out smaller capitalized stocks that consistently perform well in the market. They target stocks with the potential to evolve into substantial businesses, offering favorable returns to investors. Consequently, investors in small-cap funds have the opportunity to capitalize on lesser-known, smaller companies, differing from institutional and large-cap investors. Resulting small-cap funds have the potential to deliver better returns in comparison to large-cap or medium-cap funds to its investors.

Features of Small Cap Funds

1. SEBI Mandate – Small Cap Funds are obligated by SEBI (Security Exchange Board of India) to allocate more than 65% of their fund corpus into small stocks, adhering to regulatory guidelines.

2. Potential for Higher Returns – With greater growth opportunities, small-cap funds can yield exceptionally high returns compared to other equity-oriented funds. Their potential for expansion allows for substantial growth potential.

3. High Risk and Volatility – Despite the potential for high returns, small-cap funds are inherently high-risk investments. These companies often lack the financial resilience to navigate challenging market conditions, leading to high volatility and susceptibility to bearish markets.

4. Long-term Growth Prospects – Small-cap funds can potentially deliver substantial returns over the long term as smaller companies may take time to establish themselves in the market, gradually outshining their peers.

Which Factors should be considered before investing in Small Cap Funds?

1. Risk Factor – Among various equity funds, small-cap funds have the highest risk factor. Resulting in the investors must assess their willingness to take risks aligned with the risk level of the fund. Plus investors who are comfortable with enduring significant fluctuations, undisturbed by negative returns in specific periods or short-term fluctuations, should consider opting for this fund category.

2. Time Period – Take into account the duration of your investment and evaluate your capacity to endure risks and potential declines. For small-cap funds, the recommended investment period should span a minimum of 10 years to leverage the advantages of compounding and withstand market volatility.

3. Investment Goals – Make certain that the balance between risk and return in your fund aligns with your objectives and suits your overall investment aspirations. Each investor has distinct investment goals and timeframes. You might possess a high tolerance for risk, actively seeking avenues to grow wealth, or perhaps you lean towards caution, prioritizing safety over potential gains, or fall anywhere in between these extremes. It’s crucial to keep your investment objectives in mind, evaluate your own risk behavior, and then select an investment strategy that aligns with your goals.

4. Portfolio Manager – It’s essential to thoroughly research both the asset management company (AMC) and the individual overseeing your fund selection. The fund manager plays a crucial role in the performance of your equity fund portfolio. Therefore, alongside evaluating the fund itself, examining the person managing the fund is equally important. However, AMCs usually have internal procedures and criteria governing stock selection, diminishing the fund manager’s direct influence and control over this process. Although the fund manager makes the ultimate decision, they aren’t solely accountable for the entire portfolio composition.

Best Small Cap Funds 2024 for Investment

Name	Sub-Sector	Market Cap (Rs. in cr.)	Close Price (Rs.)	PE Ratio (%)	5Y Historical Revenue Growth (%)	5Y Avg Net Profit Margin  (%)	1Y Forward EPS Growth (%)	Return on Equity (%)
Indian Energy Exchange Ltd	Power Trading & Consultancy	12,049.03	135.50	39.39	13.74	59.74	13.81	40.72
Central Depository Services (India) Ltd	Stock Exchanges & Ratings	18,934.36	1,811.90	68.62	22.44	45.88	33.68	23.06
Aptus Value Housing Finance India Ltd	Home Financing	15,057.53	301.80	29.93	40.85	40.49	20.59	16.08
ICICI Securities Ltd	Investment Banking & Brokerage	21,806.79	674.80	19.51	12.98	34.79	13.79	42.31
Easy Trip Planners Ltd	Tour & Travel Services	7,300.94	42.00	54.40	27.73	29.17	65.13	44.28
Eris Lifesciences Ltd	Pharmaceuticals	12,201.29	897.00	31.93	13.97	27.42	14.28	18.51
CE Info Systems Ltd	Software Services	11,496.61	2,127.10	107.19	14.39	27.16	26.09	21.71
Aavas Financiers Ltd	Home Financing	11,788.34	1,489.85	27.44	26.64	26.47	16.11	14.14
Indiamart Intermesh Ltd	Online Services	15,482.30	2,584.20	54.55	22.11	24.04	115.67	14.43
Manappuram Finance Ltd	Consumer Finance	12,738.84	150.50	8.52	14.17	23.90	38.05	16.58

The above-mentioned Small Cap Funds are the most suitable investment options for investors who are looking for long-term investment opportunities.

Should you invest in Small Cap Fund for Long Term?

Making an investment in Small Cap Funds for long term can be beneficial for several reasons:

1. Growth Potential – The companies that has small capitalization have ample space for growth in comparison with other larger established companies. Their potential for substantial long-term growth arises from their capacity to expand and solidify their presence within their industries.

2. Embracing early Growth – By investing in smaller companies during their early stages, you gain from their growth journey. As they progress and thrive, the potential for a considerable increase in the value of your investment becomes apparent.

3. Diversification – Incorporating small-cap funds into your investment portfolio helps spread your risk. These funds frequently operate autonomously from larger stocks and can offer a safeguard against market fluctuations.

4. Unnoticed Attention – Smaller companies often escape the notice of institutional investors, presenting individual investors with a chance to uncover hidden treasures that have the potential for exceptional long-term performance.

Conclusion

In summary, delving into the realm of small cap funds as a potential investment avenue can prove lucrative for investors aiming for growth opportunities. These funds, centered on smaller market capitalization companies, offer a distinctive pathway for diversification and the possibility of substantial returns. With the help of financial advisor investors can potentially capitalize on the growth prospects offered by the best small cap funds for a well-rounded investment portfolio.