Top Small-Cap funds to invest in 2022

Introduction

If you have a high-risk appetite and wish to benefit from the growth potential of emerging companies, investing in the best small-cap funds can help you. According to the Securities and Exchange Board of India, small-cap mutual funds must invest at least 65% of their fund money in small-cap companies. 

Small-cap companies comprise all publicly listed companies that are below the top 250 companies by market capitalisation. 

Features of small-cap mutual funds

• Small-cap mutual funds invest in small-cap companies. These could be companies with smaller revenue and are in early phase of their lifecycle
• Small cap companies could exhibit a high growth potential. Therefore, small-cap mutual funds could provide high returns 
• These funds are highly volatile. Small-cap companies may not be financially stable. This can cause the price to fluctuate wildly 
• Owing to their extreme price fluctuations, small-cap companies can be risky investments. Consequently, most small-cap mutual funds are rated as high-risk investments
• During a bull run, small-cap funds usually outperform mid-cap and large-cap funds. The reverse is true during a bear market  

Why invest in small-cap funds? 

The prices of small-cap companies are extremely volatile. That’s because these companies are still growing and have the potential to become large cap or mid cap in the future. When you invest in the top small-cap funds that have exposure to the best small-cap companies, you stand the chance of making a higher profit. The price volatility combined with the potential for growth makes a perfect recipe for high returns in the long run. 

That’s another aspect of small-cap mutual funds to keep in mind. These are not for the short term. Experts suggest that you should consider an investment horizon of at least five to seven years. These are also not for the faint-hearted. If extreme price volatility irks you, it may be best to steer clear of these funds. 

Additional read: How to Choose the Best Equity Mutual Fund

Top small-cap funds to invest in 2022

While there are many small-cap mutual funds to choose from in the market, here are top picks from ICICIdirect that are likely to provide reasonable returns in the long run:

Conclusion

The best small-cap funds have the potential to make you wealthy in the long run. However, like every other investment, you must do your research. Do a background check on the historical performance of the mutual fund and the fund managers. Also, make sure that your risk appetite is high enough to stomach the extreme volatility of small-cap mutual fund investments.