Investing, nowadays, is not as easy as it might sound. Be it investing directly in equity or through mutual funds, every way requires a considerable amount of research and effort to choose the right stock or fund, manage it, and acquire returns. In case of mutual funds, it becomes difficult for a person if the chosen fund fluctuates according to the market condition. Yeah! We are talking about small-cap mutual funds here. These funds are too much volatile in nature and could easily leave their investors bewildered with their constant fluctuations.
But, one must not be risk averse and turn his back on the funds of this category. The most important thing that investors are required to understand is investment in equity comes with risk which changes in line with the size of company. Risk and returns are directly proportional to each other in case of small-cap funds. The more you dare to take risk, the more is the possibility of getting rewarded with high returns.
From the past three years, we have been witnessing the exceptional performances of small-cap funds which have lured too many investors. But, some investors who are risk averse assume that these mutual fund investments are like pie in the sky because of obvious reasons. For these investors we have some tips that can be kept in mind prior to the investment in these mutual funds.
Research It Out
It is a known fact that a fund's past performance does not guarantee its future performance. But that does not mean you should not do prior research about its investment strategy, fund manager, past performance, etc., before investing in it. Certainly, if you desire to acquire handsome returns by investing in small-cap funds, then you are required to spend sufficient time researching about it.
Long-Term Investment Horizon is the Goal
As discussed earlier, small-cap funds are highly volatile in nature and tend to fluctuate regularly with bear and bull phases of the market. So, investing in them with a short-term perspective is not a solution. You must work on the adage-'Patience is the key.' If you want to know how these funds have been performing, you have to look at their past 5 or 10 years' performance. So, if you are going to invest in these funds, you must invest for a long stretch of 5-10 years.
All Eggs in One Basket- NO!
Diversification is a capacious term which when applied to investing means buying more than one type of equity instruments. Diversifying a portfolio helps in distributing the risk and minimizing the losses. Because sticking to only one investment style which makes you hold on only small-cap funds could leave you with loss when the market goes down. A well diversified portfolio which contains a mix of stocks can help you enjoy profits even when these funds hit down.
Timing the Market-NO, Time in the Market-YES!
Timing the market has been considered a foolish activity by many of the financial industry experts. Timing the market is not only nerve-racking, but also risky for your investment portfolio. You can never predict the market and its certainties because you never know which factor will influence the market sentiments hence, driving it up and down. So, best way is to stay away from the habit of timing the market and start your investments as early as possible with a long-term goal.
Investment Philosophy Suitability
The investment philosophy that the fund follows must be in line with the portfolio objectives. This aspect of investment is very crucial during the times of heightened volatility. As being an investor staying patient at the time of market hit is very difficult, so if the investment strategy and philosophy must be in a way that should support your risk profile and investment objective.
Though we cannot anticipate how a small-cap fund would perform in a particular market condition, but if you keep the above tips in mind, then investments in these funds will also be beneficial for those who fear high risk. If you haven't invested in mutual funds yet then you must seek your financial adviser's advice and start investing now.