Investing today is not as easy as it seems. Whether investing directly in stocks or through mutual funds, each way requires a considerable amount of research and effort to choose the right stock or fund, manage it, and earn returns. In the case of mutual funds, it becomes difficult for a person if the chosen fund fluctuates depending on the market conditions. Yes! We are talking about small cap mutual funds here. These funds are too volatile by nature and could easily leave investors baffled with their constant fluctuations.
But one should not be risk averse and turn his back on funds in this category. The most important thing for investors to understand is that investing in stocks carries a risk that changes according to the size of the company. Risk and return are directly proportional to each other in the case of small cap funds. The more you dare to take risks, the greater the chance of being rewarded with high returns.
Over the past three years, we’ve seen exceptional returns from small-cap funds that have attracted far too many investors. However, some risk-averse investors assume these mutual fund investments are pie in the sky for obvious reasons. For these investors we have some advice that they can take into account prior to investing in these mutual funds.
- research it
It is a known fact that a fund’s past performance is no guarantee of its future performance. But that doesn’t mean you shouldn’t do some prior research on its investment strategy, fund manager, past performance, etc., before investing in it. Without a doubt, if you want to earn good returns by investing in small cap funds, you should spend enough time researching them. - Long-term investment horizon is the goal
As discussed above, small cap funds are highly volatile in nature and tend to fluctuate regularly with both 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 performed, you should look at the performance of the last 5 or 10 years. So if you are going to invest in these funds, you should do it over a long period of 5 to 10 years. - All eggs in one basket – NO!
Diversification is a broad term that, when applied to investing, means buying more than one type of capital instrument. Diversifying a portfolio helps spread risk and minimize losses. Because sticking to a single investment style that forces you to hold only small-cap funds could leave you at a loss when the market goes down. A well-diversified portfolio containing a mix of stocks can help you enjoy profits even when these funds fall. - Timing the Market-NO, Time in the Market-YES!
Timing the market has been considered foolish by many in the financial industry. Timing the market is not only stressful, but also risky for your investment portfolio. You can never predict the market and its certainties because you never know what factor will influence market sentiment and therefore drive it up and down. Therefore, the best way is to stay out of the habit of timing the market and start your investments as soon as possible with a long-term goal. - Appropriateness of investment philosophy
The investment philosophy followed by the fund must be in line with the objectives of the portfolio. This aspect of investing is very crucial during times of increased volatility. As an investor it is very difficult to be patient at the moment of market shock, so the investment strategy and philosophy should be in a way that supports your risk profile and investment objective.
Although we cannot anticipate how a small-cap fund would perform in any particular market condition, if you keep the tips above in mind, investments in these funds will also be beneficial for those who fear high risk. If you haven’t invested in mutual funds yet, you should seek the advice of your financial advisor and start investing now.