The benefits of investing in small-cap funds for long-term growth

When it comes to wealth creation, mutual fund investments are one of the most versatile and favoured options available. But did you know that among them, small-cap funds hold the power to boost your long-term growth? Small-cap funds are mutual funds focused on equities, required to invest at least 65% of their assets in equity and equity-related instruments of small-cap companies. As per Securities and Exchange Board of India (SEBI) regulations, these companies are ranked from the 251st position onwards in terms of market capitalisation. 

Let’s understand in detail why these funds deserve a place in your portfolio and how they can contribute to long-term growth.

High growth potential for wealth creation

A small-cap fund has more potential for growth due to its smaller size. Such companies could double or triple their market value faster than larger firms because they are starting from a lower base. Their smaller size also makes them more flexible and adaptive to market trends or technological advancements. These characteristics could help them capture larger market shares and increase their valuation over time.

You invest in future leaders

Today’s small-cap companies could be tomorrow’s market leaders. Many large-cap giants once started as small-cap companies before achieving high growth. Since small businesses are typically young, agile, and positioned in underpenetrated or emerging markets, they have more room to experiment and grow.

Early investments in these companies, whether through Systematic Investment Plans (SIPs) or lump sums, can lead to significant financial growth. An SIP offers a disciplined way to invest gradually with as little as ₹500, while lump sum investments can be strategically timed to grab market opportunities and boost returns.  

As they increase their market presence, improve profits, and establish strong reputations, you have the opportunity to benefit from their growth journey. 

You can find undervalued opportunities

Companies in this category typically have a market capitalisation below ₹5,000 crore and operate in niche or emerging sectors. They are often under-researched due to their size, limited visibility, and lower trading volumes. This lack of attention could lead to situations such as mispricing, where these stocks trade at values far below their intrinsic worth. 

Fund managers in small-cap mutual funds leverage detailed research to identify such undervalued opportunities before they gain wider market attention. As these companies grow or improve profitability, the market eventually corrects their valuations, which may create significant value for long-term investors.

You enjoy tax benefits

Small-cap funds come with attractive tax benefits for long-term investors. If you hold these equity funds for over 12 months, the returns are taxed as Long-Term Capital Gains (LTCG) at a flat rate of 12.5%. Also, gains up to ₹1.25 lakh in a financial year are exempt from tax (applicable only on domestic equity investments). This combination of strong growth potential and tax efficiency makes small-cap funds an excellent choice for building long-term wealth. 

Invest in small-cap funds today! 

Small-cap funds can be an excellent tool for wealth creation, especially for investors with a long-term mindset. They offer strong growth potential, portfolio diversification, early entry into future market leaders, and valuable long-term tax benefits. While these funds can be volatile in the short term, their benefits can be equally significant when approached with discipline and a thoughtful strategy.

Online platforms make it easy to invest in small-cap funds via an SIP or a lump sum option. Whichever method you choose, make sure to research thoroughly, diversify wisely, and stay committed for the long term.

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