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Investing nowadays is not as easy as it seems. Investing in equity directly or through mutual funds, each way requires a fair amount of research and effort to choose the right stock or fund, manage it and generate returns. In case of mutual funds, it becomes difficult for an individual if the chosen fund fluctuates according to the market condition. Yes! We are talking about small cap mutual funds here. These funds are very volatile in nature and can easily mislead their investors with their constant ups and downs.
But, one should not be risk averse and turn away from this category of funds. Most importantly, investors need to understand that investing in equity comes with risks that vary with the size of the company. In case of small-cap funds, the risk and returns are directly proportional to each other. The higher the risk you dare to take, the higher your chances of being rewarded with higher returns.
Over the last three years, we have been witnessing exceptional performance of small-cap funds which has attracted a lot of investors. But, some investors who are risk averse believe that these mutual fund investments are like pie in the sky for obvious reasons. We have some tips for these investors which can be kept in mind before investing in these mutual funds.
- research it
It is a known fact that the past performance of the fund does not guarantee its future performance. But this does not mean that you should not do prior research about its investment strategy, fund manager, past performance etc. before investing in it. Certainly, if you want to get good returns by investing in small-cap funds, then you need to spend enough time researching about it.
- Long term investment horizon goal
As discussed earlier, small-cap funds are highly volatile in nature and fluctuate regularly with the bearish and bullish phases of the market. Hence, investing in them from a short term perspective is not a solution. You should work on this adage- ‘Patience is the key.’ If you want to know how these funds are performing, you have to look at their last 5 or 10 years performance. So, if you are going to invest in these funds, you should invest for a long time horizon of 5-10 years.
- All eggs in one basket- No!
Diversification is a broad term that when applied to investing means buying more than one type of equity instrument. Diversifying the portfolio helps in spreading the risk and reducing the loss. Because sticking to only one investment style that requires you to hold only small-cap funds can put you at a disadvantage when the market goes down. A well-diversified portfolio consisting of a mix of stocks can help you enjoy gains even when these funds fall.
- Market Timing-No, Timing the Market-Yes!
Market timing has been considered an unwise activity by many financial industry experts. Timing the market is not only stressful, but also risky for your investment portfolio. You can never predict the market and its certainty as you never know which factor will affect the sentiments of the market and drive it up and down. So, the best approach is to break away from the habit of timing the market and start investing as early as possible with a long term goal in mind.
- investment philosophy suitability
The investment philosophy followed by the fund should be in consonance with the objectives of the portfolio. This aspect of investing is very important in times of high volatility. As an investor it is very difficult to be patient when the market hits, so if the investment strategy and philosophy should be in such a way that it supports your risk profile and investment objective.
While we cannot predict how a small-cap fund will perform in a particular market condition, but if you keep the above tips in mind, investing in these funds will be beneficial even for those who are high risk-averse. are afraid If you are yet to invest in Mutual Funds, you must consult your financial advisor and start investing now.
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