Top 5 Small-Cap Funds to Invest in 2022

Earning returns has always been the primary goal of stock market investors, and small-cap schemes continue to entice them. In the last year, the small-cap category has returned roughly 37.79%. This is the result of a significant drop in the small-cap section and the overall market.

However, investors should be aware that the small-cap category's performance last year may not be repeated this year. Investing in small-cap stocks also carries a certain amount of risk at this time. If you are looking to invest in this category, this article may assist you.
 

What Are Small-Cap Mutual Funds?

These are largely equity mutual funds that focus on investing in small-cap equities and equity-related products. These funds allocate at least 65% of their total assets invested in small-cap firms. According to SEBI, small-cap funds are compulsorily required to invest in companies with a market value of less than INR 500 crores.

Small-cap entities are fast-rising enterprises with aggressive development plans. Such stocks have greater instability and are sensitive to market fluctuations. Consequently, small-cap mutual funds are understood to be riskier than big-cap, mid-cap, or multi-cap funds.

Features of Small-Cap Mutual Funds
 

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1. Risk

These funds generally feature a higher level of risk in comparison to large/mid-cap funds. The reason behind this is that large and mid-cap firms are more established. Unfavorable market moves have a lesser impact on them when compared to smaller firms. On the contrary, small-cap enterprises are newer businesses. Even a slight drop in the market might have an adverse impact on these businesses.

2. Returns

These funds come with the potential to outperform market returns. Amid a bull market, these stocks generate high-yielding results. However, the returns may be badly influenced in bearish conditions, or the fund may even face major losses. 

3. Long-term investment horizon

If you are making investments in small-cap funds, make sure you hold it for at least seven years. Long-term investments will assist in diversifying the risks that come with them while also creating significant profits.

4. Invest in small-cap companies

Small-cap mutual funds invest in small-cap businesses. Because the companies are young, they have a higher growth potential than large and mid-cap funds.

5. Taxed as equity funds

As small-cap schemes invest in the equities of small-cap firms, these are treated as equity funds and are taxed accordingly. The noticeable catch here is, although being equity-oriented, these funds do not qualify for tax savings like ELSS funds (Equity Linked Savings Scheme). These funds are broadly taxed in two ways, i.e., tax on capital gains and dividend income.
 

Benefits of Investing in Small-Cap Funds

1) Small-cap mutual funds invest in small-cap firms with strong growth prospects.

2) Small-cap stocks have a high degree of market adaptability. Their tiny size allows companies to respond to market developments quickly.

3) Small-size fund managers include high-quality, reasonably priced stocks in their portfolios. This raises the likelihood of achieving market-beating returns.

4)Top small-cap funds broaden a portfolio's diversity. Small-cap investors can vary their sector allocation and widen their portfolios by investing in small caps. 

The Top Five Small-Cap Funds

The best small-cap mutual funds to invest in 2022 in India are:

1. Axis Small-Cap Fund (Growth)