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How important is it to invest in a small-cap fund for wealth creation?

Small-cap funds should not make up more than 10-15 per cent of any portfolio. Those investing in multi-caps may choose to avoid them, as they already have the necessary exposure, suggests Ashutosh Gupta

How important is it to invest in a small-cap fund for wealth creation?
- Raushan Kumar

Well, it's not at all compulsory to invest in a small-cap fund. The small-cap segment of the market generally tends to be more rewarding over the long term but stocks in this segment are also riskier and more volatile. Typically, they have a higher mortality rate. These companies also find it harder to survive through economic shocks that we witnessed during the pandemic time. Also, there can be other issues like corporate-governance issues, which could be hard to detect or unearth.

So, it is basically a high-risk, high-reward strategy meant to play a supplementary role in an investor's portfolio. One should not allocate more than 10-15 per cent of one's overall corpus to small-cap funds and that, too, if one is ready to withstand severe ups and downs in the portfolio value. Otherwise, one can easily do without these funds. Remember even multi-cap funds typically allocate some portion of their money to small caps. So, even if you are investing in multi-cap funds, you tend to give a reasonable small-cap exposure to your portfolio.

Now, if you do decide to take some measured exposure to small caps, it is desirable and preferable to do so through mutual funds rather than directly in stock markets. This is because this segment of the market requires a far deeper level of research and continuous monitoring, which may be difficult for an individual retail investor to do on his own.

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