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

Investing in small caps requires discipline and courage, says Dhirendra Kumar

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.

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