Investing in micro-cap funds, like any mutual fund, is subject to market risks, but the risk with micro-cap companies is more so due to the size of the company. Having an experienced manager with prior experience in identifying such companies is of prime importance. It important for you to pick funds that you can stick to for a long time. Like any other fund, these relatively new and lesser known funds would also go through the various market cycles and returns may not be as lucrative then. The prospects of high returns can’t be the only determinant in the choice of this fund. Understand the liquidity factor or the lack thereof, before opting for micro-cap funds. Investors should keep some basic points in mind before investing in micro-cap funds. Considerations for investing in micro-cap funds Higher exposure to these funds would leave them vulnerable to sudden market volatility which could then lead to panic redemption by investors. Another reason why this fund is closed-ended is also that of the illiquid nature of these funds. This helps to restrict the cash influx and outflows, which further enables asset managers to take long-standing decisions.
In fact, barring for one or two exceptions, all micro-cap funds are close-ended. Why are Micro-Cap Funds Closed Ended?Īs the micro-cap companies are smaller than even small-cap companies, fund managers prefer close ended micro-cap funds. When investing in these funds, it is important to be mindful of your own risk tolerance. With such high risk, the returns are of an equally high nature. Most of these companies are illiquid and fund manager have to avoid concentrated exposure. One major risk factor is the company’s liquidity. This means you should be willing to invest for longer than seven years. As an investor, it is better if you have a long-term investment horizon. Given the size of micro-cap companies, if managed well, they have the potential to grow, but that takes time. The remaining companies, ranking 301 and beyond, are classified as micro-cap companies. The top 100 companies in the list are categorized as large-cap, while the immediate next 100 are mid-cap, followed by the next 100 referred to as small cap. Some of the fund houses invest based on the market capitalization, while others do so based on the S&P BSE SmallCap Index. The definition of micro-cap funds differs in different fund houses. Such an emerging category of funds is referred to as micro-cap funds. Fund houses, therefore, launched schemes that tapped into smaller companies before others picked them or their prices started to rise. With the expansion of the equity markets and more exchange-traded-funds and index funds, it was becoming increasingly difficult for Asset Management Companies to differentiate between large cap and other funds, and hence it culminated into offering schemes that catered to small-cap firms.
Best Multi Asset Allocation Mutual Funds.
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