Why do small-cap funds invest in mid-cap companies?

Why do most small-cap funds have significant allocation to mid caps in their portfolio? — Anonymous Contrary to belief, small-cap funds don't invest all their money in small-cap companies. That's because market regulator SEBI has allowed them some flexibility. These funds are required to invest at least 65 per cent of their assets in small caps. It's up to the fund manager to decide whether to allocate the remaining 35 per cent to mid caps and large caps, depending on market conditions and investment opportunities. Since small caps tend to be more volatile and carry liquidity concerns, spreading the exposure to other market caps mitigates these risks. Where do small-cap funds invest? 28 active funds, on average, allocate 82 per cent of their assets to small caps and 13 per cent to mid caps (as of August 31, 2024). Only six of them have over 15 per cent exposure to mid caps. Their performance has been a mixed bag: three funds outperformed the Nifty Smallcap 250 TRI over the past three years

This article was originally published on October 03, 2024.