Small-cap mutual funds are mutual funds that have shares of small-cap stocks with low market capitalization. These stocks are with small companies, new companies, or companies in an industry just beginning, so they tend to be risky, and they can experience sudden drastic losses. So are small-cap mutual funds a good investment?
Small-cap mutual funds are a good investment for the long term. Small-cap stocks are risky investments, but they can offer huge returns over time, so if you can leave your money in a small-cap mutual fund for at least five to ten years, you have a good chance of seeing a high return.
In this article, I will explain what small-cap stocks, small-cap mutual funds, other cap stocks, and market capitalization are all about. Then, I will also provide a detailed explanation of why small-cap mutual funds are a good investment and the few risks they carry. Finally, there are some resources you can use to learn more about small-cap stocks and mutual funds and how you can successfully invest in them.
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Table of Contents
What Are Small Cap Stocks and Mutual Funds?
A small-cap stock is a stock with a small market capitalization compared to other companies. These stocks usually have a market capitalization value between three hundred million dollars and two billion dollars. This range can vary, but these are the companies with lower stock values on the market.
The market capitalization of a stock is the total value of the company’s outstanding shares in dollars. The value is calculated by multiplying the current number of shares by the current price of each share.
For example, say XYZ company has ten million shares of stock outstanding, and each share is currently valued at sixty dollars. The market capitalization is equal to sixty multiplied by ten million, or six hundred million, making it a small-cap stock.
The opposite of small-cap stocks is large-cap stocks with a market value of more than ten billion dollars. There are also mid-cap stocks between small and large-cap stocks with a market capitalization between two billion and ten billion.
So, a small-cap mutual fund is a mutual fund with nearly all, if not only, small-cap stocks. These mutual funds have a big focus on large growth in the long term, even if there are losses over time. Since these mutual funds are all new and small stocks, they carry more risk than many other mutual funds like large-cap mutual funds. However, as every investor knows, higher risk means a higher return if the fund is successful.
Why Are Small Cap Mutual Funds a Good Investment?
As long as you are looking for a long-term investment and know that your investment is susceptible to large losses at any time, small-cap mutual funds are a good investment. If you can be patient with your fund and not pull your money out early, you are highly likely to see a high return from your small-cap mutual fund investment.
Compared to higher cap stocks, small-cap investments are not as established in the market or are smaller companies in general, including startups. Investing in these companies can be risky, especially when there are many of them together in one mutual fund.
The risks with these companies become especially apparent when an event negatively affects the entire market. In case of market downturns, the losses suffered by small-cap stocks and funds are greater than larger caps.
However, small-cap mutual funds have continuously had better growth in the long term than large-cap mutual funds. The high growth is because smaller companies have more room for growth compared to larger companies. Yes, large companies like Amazon and Google continue to grow year over year, but it takes them much longer to double their value than small-cap stocks.
Small-cap stocks are usually for companies that are not as well known yet, so you can beat many investors to the next big company. If you can invest in a mutual fund with many small-cap stocks, you will experience a huge amount of growth as soon as the companies gain popularity.
Risks of Investing in Small Cap Mutual Funds
Small-cap mutual funds do experience sudden decreases in value, and the losses are larger than other stocks. However, mutual funds are best as a long-term investment, especially small-cap mutual funds.
So, even when there is a sudden drop in your small-cap mutual fund, there will be gains to offset the loss. But, you will need to leave your money in the fund to experience the gain, and do not panic and pull your money out of the mutual fund.
There is also risk associated with any mutual fund. No investment will guarantee you a return, and you can lose all of your money with no warning.
However, choosing a diversified mutual fund is important, especially with small-cap funds. Small-cap companies are usually in new industries or small niches. If one industry loses all its value, you will want to have a fund with many other companies to offset the loss.
Additionally, having a strategy and knowledge about mutual funds before you choose one is important. In the next section, you will find resources that you can use to learn more about small-cap investments and mutual funds.
If you do not choose a small-cap mutual fund that is well managed, well-diversified and offers you a long-term investment, you will not see any large gains, and you can even lose a lot of, or all, of your investment.
Small-Cap Mutual Funds Resources
If you want to be successful in investing in small-cap mutual funds, or mutual funds and small-cap stocks in general, you need to learn about them and the strategies that investors use.
Many books from Amazon.com can teach you about these stocks and mutual funds, and we have listed the best of them below.
- Mutual Funds: Comprehensive Beginner’s Guide to Create Wealth Using Mutual Funds: This guide is the perfect place to start if you are a beginner who wants to start investing in mutual funds. You will learn about the different types of mutual funds, choosing mutual funds, what mistakes to avoid when investing in mutual funds, and some tips and strategies that you can utilize.
- Mutual Fund Small Caps: The Better Choice: This book compares small-cap mutual funds and large-cap mutual funds to prove why investing in small caps is better. The book starts with some historical data, then explains why small caps are a good investment, and finally how small-cap mutual funds compare to other types of investments.
- The Small-Cap Investor: This book is all about small-cap investments. You will learn how to choose small-cap stocks, what you need to know before investing in them, and a proven strategy to use when you are ready to invest in small-cap mutual funds.
- The Small-Cap Advantage: This book will convince you that bigger is not better when it comes to stock caps. The book will help you understand how to find the best small stocks, illustrate different strategies used by successful small-cap investors, and explain the most important aspects of small-cap stocks.
Author’s Recommendations: Top Trading and Investment Resources To Consider
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Conclusion
Small-cap mutual funds are a good investment if you can invest for the long term and find a well-diversified fund. Since small-cap stocks lose value more easily and fluctuate more than other large-cap stocks if your fund experiences a large loss, it will come back over time, but you need to be patient.
Even though small-cap mutual funds can experience large losses compared to other investments, they can also experience the biggest gains, so they are a good investment.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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