Essential parameters to consider while choosing the best Small-Cap Mutual Funds

The small-cap sector is home to most companies, including active and passive investors. With a market capitalization of approximately Rs. 5,000 crore, Small-Cap Funds are ahead of Mid- and Large-Cap Funds. Increasing demand for small caps leads to a price increase and vice versa. Small-cap investing has a fair share of rewards.

According to the historical returns data, a rising tide raises all ships, and Small Cap Mutual Funds ride the waves well. The top funds have a long-term history of beating the S&P 500. While there are many fund types, choosing the right one is essential. Consider these parameters:

Risk and return

Small-Cap Funds are usually more volatile than Large-Cap Funds, offering better returns. A good fund has a mix of companies producing robust earnings growth that temporary problems have beaten down. Opt for a fund with an average annual turnover rate below 50% to reduce your risk profile.

Expense ratio

It is the amount an investment company charges annually for managing your portfolio. The expense ratio covers everything from trading commissions to analyst salaries and administrative costs. The lower it is, the better the fund. You should prefer the best Small-Cap Mutual Funds to invest in, having an expense ratio lower than 1%.

Performance

You can determine the fund’s performance by checking its historical performance over three to five years. The aim is to see whether it has generated consistent returns and if they have been better than similar vehicles available in the market. You can select your investment mode between Lumpsum and Systematic Investment Plan. Ideally, investing in these funds through SIPs is safer as you risk too little against market fluctuations.

Investment strategy

Another consideration when choosing a Small-Cap Fund is its investment strategy. Check the assets invested in Stocks, Bonds, or cash instruments while selecting the DSP Small-Cap Fund, for instance. You should also know its benchmark index and how closely the fund tracks it. Also, consider whether it follows active or passive approaches towards investing.

Assessing the best scheme

How do you know which scheme is best for personal investing? There is no one-size-fits-all answer. It depends on what type of investor you are and how you want to set up your future. Once you understand your profile, you can make a more informed choice about the best Small-Cap Mutual Funds for investment to achieve your goals.

The top Small-Cap Funds have a low expense ratio, allowing them to deliver potentially higher returns over time without charging high fees and an average return on assets. They only buy and sell their holdings sometimes, which means they have low turnover. These are easier to manage if your fund manager has the relevant experience.