Small-cap index funds can be a good investment for investors with a long-term horizon and higher risk tolerance. They offer potential for growth and diversification, but it's important to carefully consider risk, volatility, and market conditions before investing.
However, investors also need to be aware and take into account the risks associated with small-caps viz. higher volatility, lower liquidity, lesser disclosures and transparency. Moreover, small-caps also are likely to be more vulnerable to economic downturns.
However, numerous small-cap stocks do not have the capacity to handle exceptionally large trading volumes. In other words, small-cap stocks can face liquidity constraints. Small Cap Mutual Funds also find it challenging to invest the inflows worth crores they are getting each month amid stretched valuations.
The overall quality of publicly traded small caps has deteriorated, as private sponsors help top performers stay private for longer. Instead of small caps, investors should consider actively adding exposure to U.S. large-cap value and mid-cap growth stocks.
Given the changing macroeconomic backdrop, we outline why we see potential value for investors in small caps in 2024. The consensus is that interest rates look to have peaked, with markets now pricing in cuts across many major economies in 2024, something which could prove beneficial to small caps.
Nifty Smallcap 100 index has fallen 4% to its lowest level since mid-June amid concerns about Q3FY25 performance. Disappointing earnings results have led to increased selling pressure, with many stocks down significantly from their 1-year highs and foreign investors pulling out funds.
The small cap segment can be extremely volatile in the short term, but they have the potential to offer very high returns over a long period. Small cap schemes are recommended only to aggressive investors with a high-risk appetite and long investment horizon, say, around seven to 10 years.
To find an appropriate investment mix for your time horizon, find your age and the corresponding portfolio allocation. A typical mixture could include 60% large-cap (established companies), 20% mid-cap/small-cap (small to medium-sized compa- nies), and 20% international (companies outside the U.S.) stocks.
The small-cap funds saw an average return of 25.69% from December 2023 to December 2024, while mid-cap and large-cap funds yielded returns of 26.91% and 14.97% during the same period. So far, the Sensex has gained 8.92% and the Nifty has risen 9.49% in 2024.
Most investors think smaller companies underperform in a recession. In most cases, they are correct. However, what's less well-known is that small caps usually exit recessions quicker than assumed – outperforming large caps. This rebound can begin as early as three months into an economic downturn.
Filter. Small Cap Fund : These mutual funds select stocks for investment from the small cap category, which includes all stocks except largest 250 stocks (by market capitalization). Suitable For : Investors who are looking to invest money for at least 3-4 years and looking for very high returns.
Since the start of 2023, the S&P 600 small-cap ETF has advanced around 25% as of the time of this writing. That's not bad for a roughly two-year period. But the S&P 500 index (^GSPC -1.54%) is up about 50%, or roughly twice as much. That's a massive outperformance on the part of the large-cap S&P 500 index.
To understand the company's financial health, You can evaluate key ratios like small cap share price, debt-to-Equity, return on Equity (ROE), and profit Margins. These ratios can provide insights into operational efficiency, which is vital when selecting the best small cap stocks.
The broadening of the market and the prospect for rate cuts during the rest of 2024 may serve as tailwinds for small-caps. In addition, small-cap earnings growth is expected to outpace large-caps as we head into 2025. With that in mind, we've honed our outlook for the asset class.
Hence, you may incur losses if you wish to withdraw or redeem your investment from the said small-cap mutual fund. Of course, that is not to say that gains cannot be made, but the risk always looms. That's why it always pays to stay invested in a small-cap fund for at least five to six years.
Invesco India Smallcap Fund Direct Growth
Fund Performance: The Invesco India Smallcap Fund has given 21.89% annualized returns in the past three years and 30.36% in the last 5 years. The Invesco India Smallcap Fund comes under the Equity category of Invesco Mutual Funds.
High risk: While small-cap companies have a lot of growth potential, they have equal potential to fail. Small-cap stocks are a riskier investment than large-cap stocks. The companies usually have less access to investment capital and are more sensitive to market changes. This makes them a riskier investment.
Small companies tend to underperform in recessions and bear markets because they simply don't have the same resources as large companies and aren't industry leaders that can more easily survive unexpected emergencies.
On average, small-caps have an advantage when the U.S. economy is in recovery mode. It's typically a great time to invest in small-cap stocks when the economy is rebounding, unemployment rates are decreasing quickly, and businesses are seeing strong earnings growth. Of course, small-cap stocks don't always outperform.