What factors should we consider while investing in small-cap funds?

Besides the risk angle, what are the other factors that we should look at while investing in small-cap funds? Should we invest in them over the next twelve months?
- Bala Subramaniam

While investing in small-cap funds, one should take two things into consideration - the investment horizon and the size of the chosen small-cap fund.

Consider investing in a fund that doesn't have a large asset size. This is because a very large small-cap fund is very difficult to manage and thus, it loses its charm. Further, since small-cap stocks normally have low liquidity, it is tricky to find many of them.

When investing in a small-cap fund, invest with a time frame of at least seven-eight years. Discipline plays a major role when it comes to investing in a small-cap fund as small caps have struggled for a long period of time. Further, all the returns come in a narrow range of time - when they do well, they go ballistic. So, all you require is extreme patience as well as courage. Investing over a long time horizon helps build that discipline.

So, if you have that temperament, look for a small-cap fund having a small asset base and stick to it.

This article was originally published on March 11, 2020.