What are micro-cap mutual funds? All you need to know

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₹5,000 crore. These funds prioritize small-scale businesses with significant growth potential. In contrast to large-cap funds, micro-cap funds offer the potential for substantially higher returns, albeit with increased volatility and a greater risk of loss.

The micro-cap sector typically garners less analyst coverage, with these smaller companies often flying under the radar of financial analysts. While this presents an opportunity to discover hidden gems, it also necessitates conducting thorough independent research to evaluate the companies' viability. Incorporating micro-cap funds into your portfolio can enhance diversification, thereby lowering overall risk.

Due to their distinct movement patterns compared to large-cap stocks, micro-caps can effectively balance out your investment holdings. The growing inclination towards micro-cap exposure in Indian mutual funds presents a double-edged scenario. This is because micro-cap mutual funds may allure investors with the promise of high returns, though the associated risks, particularly amidst elevated valuations, are substantial.

Here's a detailed analysis of the situation: Elevated valuations: Micro-cap stocks frequently trade at inflated valuations. This indicates limited potential for future growth, and any setbacks could result in substantial losses. Market fluctuations: Micro-cap stocks inherently exhibit greater volatility compared to larger corporations.

This characteristic implies that their prices may fluctuate dramatically, rendering them a riskier investment option. Restricted liquidity: Micro-cap stocks frequently exhibit limited liquidity, making it challenging to swiftly sell your shares when necessary. Despite the significant risks associated with micro-cap