8 best small cap mutual funds to invest in 2024
Investing in small-cap mutual funds offers an opportunity to participate in the growth potential of promising companies. Nevertheless, investors must acknowledge the accompanying higher levels of risk. Large investors frequently underestimate small-cap companies, presenting an opportunity to discover undervalued gems that boast substantial growth potential.
Historically, small-cap funds have demonstrated superior performance compared to other equity categories over extended periods, presenting the prospect of generating alpha, i.e., excess returns beyond the benchmark. Nonetheless, these funds generally allocate investments to a smaller pool of companies, elevating the concentration risk and the possibility of losses if a subset of companies underperforms.
Additionally, small-cap stocks exhibit heightened sensitivity to market fluctuations, resulting in more pronounced price volatility, both on the upside and downside, compared to their large-cap counterparts. This phenomenon explains the extreme highs and lows observed in funds that invest in these stocks.
To identify small-cap funds that have maintained consistent performance over the last decade or more, it’s essential to first grasp the nature of these funds and recognize their potential contribution to an investment portfolio.
Small-cap funds are mutual funds with an equity focus, obligated to allocate a minimum of 65 per cent of their assets to equity and equity-related instruments of small-cap companies. They possess the flexibility to invest the remaining 35 per cent in stocks of large-cap or mid-cap companies, debt instruments, or cash and equivalents.
These funds have the potential to recognize and invest in undervalued companies, paving the way for
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