Small value cap funds: Exploring the potential
Small value cap mutual funds offer you the opportunity to make the most out of the potential of smaller organisations that are otherwise undervalued by the capital market. Such funds typically invest your investible in organisations with market capitalisations below a specific threshold and focus on those with pragmatic fundamentals and a high growth potential. While small-cap value funds are commonly categorised under the high-risk investment category, they can even offer benefits to conservative investors if approached strategically.
Who can consider investing in small-cap value funds?
Small-cap value funds are best for those with higher risk appetites and looking for higher potential returns. Such retail investors must have a high tolerance level for market volatility and stay invested for longer time periods. However, it is worth noting that conservative investors too may consider allocating just a small percentage of investible towards small-cap funds to gain the benefit of diversification.
What are the distinct advantages and downsides of investing in small-cap value funds?
Advantages
- Potential to generate high returns
Small companies come with the potential to generate considerable returns as they capitalise on emerging trends with the aim to disrupt established organisations.
- Diversification
Including small-cap value funds in your investment portfolio offer diversification benefit and lowers the overall investment risk.
- Undervalued opportunities
As small-cap value funds figure out undervalued stocks, they provide you with the opportunity to purchase at a low cost and potentially sell at a high.
Downsides
- Liquid concerns
Smaller companies might have lower trading volumes, which makes it challenging to purchase or sell shares instantly without any impact on the stock price.
- Higher volatility
Small-cap value stocks are highly volatile than large-cap stocks, which results in increased price fluctuations.
To manage the downsides, you can adopt the below-listed strategies –
- Invest in long term horizon
Investing in a small-cap value scheme with a long-term perspective enables undervalued stocks to potentially grow as well as lowers the impact of short-term market fluctuations.
- Diversification
Clubbing small-cap value schemes with other financial options like bonds or large-cap stocks helps offset risks and results in a balanced portfolio.
- Due diligence and research
Thoroughly researching the potential holdings as well as understanding the fund’s objectives and investment strategy can meet the risks linked with individual stocks.
Exploring small cap value funds’ potential
- Portfolio diversification
Including small cap mutual fund investment to your investment portfolio permits you to gain exposure to a distinct market segment. This diversification assists lower the risk of depending completely on large-cap funds, offering relief against market volatilities or downturns.
- Market inefficiencies
Small-cap stocks often are missed by institutional retail investors resulting in potential pricing inefficiencies. Knowledgeable and skilled fund managers tend to exploit such inefficiencies by figuring out undervalued companies, enhancing the chances of earning above-average returns.
- High returns
Small-cap value mutual funds historically have outperformed large-cap mutual funds over long time periods. While previous performance does not assure future outcomes, the potential to generate higher returns exists owing to undervalued small organisations’ growth prospects.
Conclusion
Small-cap value mutual fund is a prudent financial option for retail investors. While investors with high-risk tolerance levels may earn potentially high returns, conservative investors can park a small per cent of their investible surplus to a small-cap value scheme to gain diversification benefits and earn inflation-beating returns.
By better understanding the features, benefits and downsides of small-cap value mutual funds and employing certain strategies to meet the associated risks, you can avail growth potential benefits and leverage the market inefficiencies of small companies with undervalued stocks.