Tips to Select the Best Small-Cap Mutual Funds
Mutual Funds are a great option for investors who wish to get returns on their investments without actively trading in stock market securities. Available in various types like direct and regular, investors can select the best that fits their investment goals and risk-taking capacity.
A mutual fund investment helps investors to diversify their investments across different shares and securities thereby reducing the chances of losses. Out of all the types of mutual funds, small-cap mutual funds offer chances of earning exponential profits in the long term. Targeting stocks of companies with low market capitalization and stock price, small-cap mutual funds offer great earning potential. However, these mutual funds are not free from risk thereby making a selection of the best small-cap mutual fund a necessity.
Here are some tips that can help investors identify and select the best small-cap mutual funds for their investment portfolio:
1. Understanding the risk-taking capacity
Investors must identify their overall risk-taking capacity before selecting a particular small-cap mutual fund. Being a risky investment, small-cap mutual funds offer chances of earning great profits but are known for their volatile nature as well. Risk-averse investors must include a single small-cap mutual fund with a 5-star rating and high investment corpus for safety. However, investors with a risk-taking capacity can include more than one small-cap mutual fund with different stocks. Moreover, investors must invest in small-cap mutual funds with a long-term horizon for better profitability.
2. Analysis of funds management
The best small cap mutual funds are managed by responsible, experienced, and educated managers appointed by well-established fund houses. Investors must therefore carefully analyse the fund managers, their educational background, and their experience before selecting a particular small cap mutual fund. A good track record of managing small-cap stocks and professional stock tracking must be identified.
3. Examine the underlying stocks and their specific industries
Investors must even examine the underlying stocks and their corresponding companies and industries before selecting a small-cap mutual fund. They must identify the individual small-cap stocks and ensure the presence of investment diversification across different stocks and industries. A diversified small cap mutual fund offers protection from volatility.
4. Careful examination of mutual fund ratios
Investors must even identify and examine the expense ratios of different small cap mutual funds. A complete comparison must be made across different small-cap funds to select the best that offers better diversification combined with a low expense ratio. A fund with a low expense ratio helps investors keep a larger portion of their profits.
5. Using fund ratings to select the best mutual funds
Investors must even examine the ratings awarded by dedicated rating agencies like CRISIL to different small cap mutual funds to select the best. A fund with a high rating like 5 offers better protection from volatility. Moreover, a high-rated small cap mutual fund delivers better performance in terms of returns.
Conclusion
Selection of the best small cap mutual funds requires a thorough understanding of various aspects and analysis of every minute aspect like underlying stocks and management. Investment in the right small-cap mutual funds helps investors get maximum returns on their investment for wealth creation in the long run.
Pranab Bhandari is an Editor of the Financial Blog “Financebuzz”. Apart from writing informative financial articles for his blog, he is a regular contributor to many national and international publications namely Tweak Your Biz, Growth Rocks ETC.
