A small-cap mutual fund is a group of small-cap stocks with a market capitalization of $300 million to $2 billion. Small-cap funds can be designed for various investment objectives, but investing in a group of companies helps mitigate risk and offers growth potential. However, small-cap investing involves higher risk due to price volatility and a lack of dividends. Small-cap index funds are passively managed, while actively managed funds choose the companies within the fund. Small-cap balanced funds offer exposure to small-cap companies while balancing risk through the use of other stocks. Micro-cap funds are a niche market that could be risky.
A small-cap mutual fund is a mutual fund or exchange-traded fund (ETF) that is made up of a group of small-cap stocks. The term “small cap” refers to a stock with a relatively small market capitalization. The term differs between brokers, but as of 2011, it generally referred to a market capitalization of $300 million US to $2 billion. Market capitalization is simply the total shares outstanding multiplied by the price per share. A small-cap fund can be designed for a variety of investment objectives.
Equity fund managers provide an overview of investment objectives and strategy. They can focus on income through value stocks or capital gains through growth stocks. Funds can be international or specific to a country or region. A small-cap fund might focus on a particular economic sector or industry. Some equity funds allocate a percentage of funds to small-cap companies and the rest to other investments.
One advantage of investing in a small-cap mutual fund rather than buying individual stocks is diversification. Investing in a group of companies helps mitigate risk. Another advantage is the growth potential. Smaller businesses are flexible and adaptable, allowing them to quickly take advantage of changing market conditions. Small-cap growth funds could experience dramatic capital gains.
The downside of small-cap investing is the higher risk inherent in smaller, non-established companies. Small-cap companies tend to be aggressive and volatile. Dividends are generally not paid because profits are reinvested to fuel rapid growth. The small-cap stock investor must have an appetite for risk due to price volatility and a lack of dividends. However, studies have shown that shareholders in smaller companies consistently earn higher returns than investors in larger large companies.
Small-cap index funds are passively managed funds made up of all the small-cap stocks within an index. An actively managed fund will choose the companies within the fund. Equity fund managers are paid to actively manage funds, including implementing strategies and interacting with investors. A good fund manager will closely monitor market conditions and suggest when to buy or sell particular stocks.
A small-cap balanced fund offers exposure to small-cap companies while balancing risk through the use of other stocks. This type of fund might use bonds to generate income or options to hedge risk. Micro-cap funds are a niche market that could be risky. There was a time when almost all companies were microcaps, even many of the largest corporations. A good micro-cap fund has a top-notch management team that can spot future industry leaders.
The investor interested in a small-cap mutual fund has access to a lot of advice and research. Most investors don’t have the time or experience to research all small-cap stocks and select the best companies. Professional advisers, investment banks and brokers provide analysis and reports on investments in small-cap mutual funds.
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