Before investing in small cap funds, know these important things, otherwise there may be loss

Small Cap Mutual Funds: Last year, many small cap mutual fund investors achieved 100% returns. Since then, people’s interest has increased regarding small cap mutual funds. However, along with investing in it, many questions also arise such as is there a safe way to invest in small cap mutual funds? What are the things to keep in mind while choosing a mutual fund? Today we are telling you some important things that you have to keep in mind before investing in small cap mutual funds.

can’t avoid risk
Before proceeding further, you should understand one thing. If you are investing in equity mutual funds, especially small cap mutual funds, you cannot completely avoid the risk and volatility. Actually small cap schemes invest in very small companies which have a bright future.

However, most of these companies have governance issues and do not live up to the promises. If these companies falter even a bit, they will get severe punishment in the stock market. Share prices can be reduced to zero in no time. Keep in mind that you are taking the same risk while investing in small cap schemes.

how to reduce risk
How do you overcome this danger? Well, you can never avoid it completely, but you can take some precautions to lighten the jitters. One, you should invest in small cap schemes only if you have a really long investment horizon. For example, don’t invest in small cap schemes if you don’t have at least seven to 10 years’ time horizon. This will give you some time to recover your losses.

Second, never make smallcap schemes your main portfolio. Smallcap schemes always go through severe ups and downs. Hence, they will not give you stable returns.

Third, always choose fund houses and managers who are known for their skills in managing small cap schemes. Keep in mind that investing in small cap schemes is very challenging. The whole game is all about identifying promising companies, placing meaningful bets beforehand, and patiently catching them to make money. Only a few fund managers have managed to deliver good returns in the long run.

Fourth, make sure that the fund size is not too big. It is very difficult to find investment options in the small cap space. When you have a really big corpus, it becomes extremely challenging. This is the reason why many fund houses are forced to discontinue their schemes for subscription after a certain time. So always choose a scheme with a small amount.

Lastly, don’t start investing in small cap schemes when you see huge returns posted by them and stop at the first sign of decline. This is a surefire way to lose money. If you are nervous about your investments during bad times in the market, it clearly indicates that you do not have the required risk appetite to invest in small cap schemes. If you have the required risk profile and long-term investment horizon, then invest in small cap schemes regularly over a long period, irrespective of the market conditions.

This is the only way to make money on your small cap investments. Lastly, small cap investing is for very aggressive investors. If every recession in the market scares you, then it is better to stay away from them.

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