Equity Mutual Funds that invest in stocks are further divided into three types on the basis of market capitalization such as micro-cap funds, small-cap funds, mid-cap funds and, large-cap funds.
Market capitalisation defines the market value of the outstanding shares of a company which is calculated by outstanding number of shares multiplied by per stock price.
- Micro-Cap Funds
A type of equity mutual fund that has a market capitalisation which ranges between 50 crores and 300 crores is termed as a micro-cap fund. The general understanding relates to lesser risk of investment in case of Large Market Capitalisation as well as small potential returns. Similarly, there is more risk of investment in case of small market capitalisation and larger the potential returns.
Micro-cap funds are considered very volatile and relatively riskier than companies that are associated with large market capitalisation. These funds are present in majority on the list of publicly traded companies. Most of these companies belong to the segment of family businesses.
- Advantages & Disadvantages
- Portfolio Diversification: One of the best advantages of investing in a micro-cap fund is the diversification it provides. This means one can invest in different types of assets and securities.
- Increased Returns: The growth of an investor is based upon the profits one makes. Micro-cap mutual funds have a strong potential of producing unpredictably high returns. Apart from the good chances, there are possibilities of meagre returns during periods of low performance.
- Risk Factor: The risk factor is shared by buying funds where majority of the stock is owned by the management. For those capable of taking high risk, micro-cap funds serve the good purpose. However, the risk may not always serve right.
Before investing in any kind of equity scheme, it is important to check the statistics of each type of fund. An investor should engage in a detailed research of the best performing micro-cap funds.