Small cap funds are an excellent way to expand your wealth. But before you invest in small cap mutual funds you should understand what they are, their risk profile, how you can weather the risks and the best small cap funds are for the financial year 2018-2019.

What is a small cap mutual fund?

The market value of a company depends on the worth of its shares that are owned by shareholders. The stocks of publicly traded companies whose market evaluation is less than INR 500 crores are categorized under small-cap.

When a fledgeling company tries to expand aggressively, it becomes vulnerable to market fluctuations. This makes small cap mutual funds a somewhat risky investment. But they also have the highest potential for growth and promise for rich dividends.

The size of the company also has a bearing on the opportunities and risks associated with the stocks of a company. Small cap mutual funds invest about 80% of the corpus in relatively small and new companies.

Who should invest in small cap mutual funds?

If you are an investor who is not averse to moderate or high risks, you can diversify your portfolio by investing 15-20% in small cap funds for a duration of 7-15 years.  Since small cap mutual funds are very volatile, you should invest for at least 7 years to cost average the highs and lows of market fluctuation.

Best small cap funds of 2018 that you can invest in are –

Reliance small cap fund

In the last 5 years, it has yielded 36% annualized returns. Its asset size presently is INR 6910 crore. It was launched on 16^th September 2010. Minimum investment amount is INR 5000.

Birla SL Frontline Equity Fund

This small cap fund has produced 25% annualized returns in the last 5 years. It was launched on 30^th August 2002. Its current asset size is INR 11,877.82 crores. The minimum investment is INR 5000.

ICICI Prudential Value Discovery Fund         

23% annualized returns in the last 5 years. It was launched on 4^th March 2004. Its asset size is INR14, 011.22. The minimum investment is INR 500.

HDFC Small cap fund

This scheme has yielded 25% annualized returns in the last 5 years. It was launched on 7^th May 2007. Its current asset size is INR 12,753.08 crore. Your minimum investment has to be INR 5000.

Axis Long Term Equity Fund   

Its annualized returns over the last 5 years have been 24.50%. It was launched on 21^st December 2009. Its asset size is INR 10,675.84 crores. The minimum investment amount is INR 500.

DSP Micro Cap Fund

It produced an annualized return of 32.80% in the last 5 years. It was launched on 4^th May 2007. Its asset size is INR 4258.52 crores. The minimum amount that you have to invest is INR 5000.

Small cap mutual funds are very volatile. But if you invest in the right small cap mutual funds and stay invested for a long stretch of time, they are likely to yield high returns. You can use an online investment app for the same.

What is SIP in mutual funds?

Systematic Investment Plan (SIP) is a method of investment in mutual fund plans. With a SIP, you can invest a fixed amount of money regularly over a period in a fund of your choice. Investing in SIP ensures long-term returns. Since the amount invested is subject to compound interest, it enhances your profit margins. SIP investments are made at regular intervals so the market risks are significantly reduced.

Here are five reasons why you should opt to invest in Systematic Investment Plans-

• Financial discipline

You can invest a pre-determined amount of money on a weekly/monthly/yearly basis depending on your preference and convenience if you opt for SIP. The chosen amount is automatically debited from the investor’s linked account and put into a mutual fund scheme. Each time the amount is debited from the account, extra units of the scheme are purchased and added to the investor’s mutual fund account. SIPs are ideal savings instruments because they offer great returns and help investors inculcate a habit of saving for the future.

 

• Multiplication of wealth through compounding

Investing in Systematic Investment Plans is not restricted to high-income investors alone. You can invest an amount as less as Rs.500 every month. Compounding is the method of earning interest by reinvesting the previously earned interest. Thus, you can turn a minimal amount of money invested into a large corpus through compounding. Simply put, SIP helps your wealth grow faster. This is one of the major benefits of SIP.

 

• Low risk of market volatility

The stock market and volatility go hand-in-hand. Investing in equity funds means you need to keep a check on the market dynamics constantly. Sometimes the stock prices may drop, or the conditions may become unfavourable, which may compel you to exit the market before maturity. Timing the market to maximize profit can be difficult. On the other hand, SIP overcomes the need to time the market with the aim of gaining higher profits. Thus, the risk of market volatility is very less.

 

• Accumulation of fund units

When investing in a SIP, the date and amount are fixed. Depending on the Net Asset Value (NAV) of the mutual fund’s assets on the day you start investing, you receive a certain number of units. Over the term of your investment, you accumulate units. On the day that you term expires, you receive your returns which essentially is your total units multiplied by NAV.

 

• Flexibility

Systematic Investment Plans are flexible as compared to other mutual fund instruments. The investor can choose the period and amount of the investment. Moreover, you can decrease or increase the instalment amount depending on your current financial situation. The investor can continue to invest or choose to opt out of the SIP plan as per their need and preference. This makes the plan more convenient for individuals.

Keeping in mind the above benefits of SIP, it is the best method to enter in the mutual fund space.

What is debt fund?

A debt fund is a type of mutual fund, which invests in ‘fixed income’ securities such as Govt. securities, Treasury bills, money market instruments, corporate bonds, and other debt securities of the varying maturities. Debt securities pay a fixed interest rate and come with a maturity date.

Debt funds offer a decent return on the investment with minimal risk. The returns comprised of interest income and capital appreciation (or depreciation) in the value of the security due to changing market dynamics. Debt securities are assigned a ‘credit rating’, which shows the issuer’s ability to pay back the debt over the period.

Now that you know what is debt fund, you should be familiar with the different types of the same.

Types of Debt Funds

Debt funds are of various types, depending on the investment needs of the investor. Here is a list of the most common types of debt funds-

• Gilt Funds

Gilt Funds invest in all long-term and short-term Govt. securities, issued by the central/state governments. There are no risks of default in case of Guilt Funds since the government issues these. However, due to a change in the rate of interest and other economic factors, the Net Asset Value of the scheme fluctuates.

• Ultra Short-term Funds

Ultra short-term funds invest in debt securities for a very short span of time. Only a small portion of the investment is made in long-term debt securities. The maturity for Ultra Short-term Funds is less than a year, usually 3-6 months. This type of debt fund is most suitable for investors who can afford to take risks with the aim of earning good returns in a short period of time. One good thing about Ultra Short-term Funds is that they are not affected by the changes in interest rate, so the returns are consistent.

• Fixed Income Funds

Fixed Income Funds invest in Govt. bonds, corporate bonds, and money-market instruments. They are extremely vulnerable to interest rate changes and so are appropriate for investors who opt for long-term maturity and have a high-risk appetite. One must time the entry and exit from Fixed Income Funds appropriately. Ideally, one should invest in these funds when the interest rates are at its highest.

• Fixed Maturity Funds

Fixed Maturity Funds (Plans) are a type of close-ended debt fund. The securities are retrieved before or on maturity, and the investor is paid the proceeds. Fixed Maturity Funds are great investment options for conservative investors since there are no interest rate related risks associated with them. However, you must ensure that you stay invested until the maturity of the scheme.

• Liquid Funds

Liquid Funds invest in liquid money market instruments such as commercial papers, treasury bills, and certificate of deposits with a maturity not exceeding 91 days. This makes this type of an investment almost risk-free. There are very fewer risks associated with such investment schemes, so Liquid Funds are considered good alternatives to savings accounts. They offer higher returns and similar liquidity.

Before you invest in debt funds, you should be well aware of the different types. This article summarizes the basics of what is debt mutual fund. Invest in the scheme that best suits your requirement and appetite.

Mutual funds are seen as a viable income source to live a comfortable lifestyle given the soaring inflation and price of commodities. Therefore, more and more people today are investing in various mutual fund schemes. Mutual funds diversify your investment portfolio and offer attractive returns.

What is close-ended mutual fund?

Considering the increasing rate of interest on mutual fund investments, close-ended mutual funds have emerged as a good investment option. In a close-ended fund, there is a restriction on the number of investors. The fund manager pools the money from different investors and manages the same without any pressure of redemption during the lock-in period.

Here is how you can make the best use of close-ended mutual funds-

• Analyzing the portfolio

There is no real-time analysis or previous record of close-ended mutual funds since these are declared and available during the Initial Public Offering (IPO). This requires you to rely completely on the analysis of the investment portfolio. To ensure that you receive better returns on investment, make sure the portfolio has the right set of securities.

 

• Considering the low liquidity of the fund

Close-ended mutual funds offer low liquidity of funds. Such mutual funds do not allow you to exit the scheme in case the portfolio underperforms due to the unfavourable market condition.

 

• Investing a large amount of money

You can make the most of close-ended funds by investing a lump sum. However, you can also choose to invest 5-10% of the amount separately in different schemes instead of putting all your money in a single scheme.

 

• Receiving differentiated income/objective

In close-ended mutual funds, the investor can invest in funds that offer differentiated income/objective. Such schemes are unique, and you need to time your entry to make the most of it.

Close-ended mutual funds can yield the investor great profits after maturity. However, to make sure you earn maximum returns, keep the above tips in mind.

Mutual fund investments are broadly divided into debt and equity funds. While debt funds are schemes where your money is invested in securities and debentures, equity funds invest money in stocks. There are a number of equity mutual fund options in the market, but some are better than others are. Therefore, you need to select the best-performing equity funds for the maximum returns on investment.

However, you should know more about equity funds before investing.

What is equity funds?

Equity funds are a form of mutual funds investment, where a majority of the money is invested into stocks and equities of various companies. Since the stock prices are volatile, equity funds investments are riskier than debt funds, but offer considerably greater returns from the investment in question.

Equity funds can be sector funds or diverse funds. However, what is sector funds? Sector funds are those equity funds where the investment is limited to just one sector, such as banking. However, equity funds may also invest in diverse fields.

Who should invest in equity mutual funds?

Equity mutual funds investment is not suitable for everyone. Since the money is invested in stocks and equities, you need to have an appetite for risk. The market will be volatile for such investment schemes, but the greater returns are well worth the risk. Furthermore, investors looking for long-term gains are best suited for equity mutual funds investment. For shorter terms or better tax saving opportunities, you should try investing in ELSS schemes.

Top 5 Equity mutual funds of India in 2018

Before choosing an equity fund, you need to determine the qualitative and quantitative aspects of each scheme. Apart from this, keep risk appetite, financial goals, and investment horizon in mind while investing money in equity funds. While you can invest for 3 years, the best returns are reserved for people who invest in mutual funds for 5 or more years.

Here is a ranking of the best equity mutual funds in India for the past 5 years.

1. HDFC Small Cap Fund

In the last 3 years, the scheme offered a return percentage of 21.52 percent, while investors received a return of 24.31 percent in the last 5 years.

2. HDFC Mid Cap Opportunities Fund

People, who invested in this scheme 3 years ago, got a return of 14.84 percent on the capital. The 5-year return was 26 percent.

3. DSP BlackRock Midcap Fund

The past 3-year term resulted in 16.77 percent return on the principal sum. However, upon investing for a 5-year term, the scheme resulted in a return percentage of 25.68 percent.

4. Birla SL Equity Fund

For an investment tenure of three years, investors earned a return of 13.7 percent on the capital sum. The same scheme netted a 21.78 percent return to investors in the last five years.

5. ICICI Prudential Value Discovery

A 7.38 percent rate of return for investment was earned in the last three years. In case of a 5-year term, the investment resulted in 21.25 percent returns on the capital.

While the above-mentioned list features only a few names, it is essential that you consider all aspects of a scheme and not simply the rate of return on investment and the fund’s performance in the past few years.

Mutual funds offer a diverse range of options to investors, based on their needs and goals. However, mutual funds can be classified into two parts, which can be further divided into subtypes. Here is a detailed look at the types of mutual funds –

On the basis of the maturity period

1. Open-Ended funds

As the name suggests, open-ended funds offer the greatest amount of freedom to investors. With these schemes, there are no fixed maturity dates and the investor is free to buy or sell units at the NAV at any point in time. Being liquid funds, the investment in open-ended funds can be made throughout the year, without any restrictions.

2. Close-ended funds

Mutual funds that have a fixed maturity period are known as close-ended funds. You cannot invest in close-ended funds at all times. If you want to invest in such schemes, you need to wait for a specific time or when they are initially launched.

3. Interval funds

Interval funds mix the characteristics of open-ended and close-ended funds. They are available only during specified intervals of the year. These intervals are pre-determined. However, during the availability of interval funds, they behave like open-ended funds.

On the basis of the fund’s objective

1. Equity funds

Equity funds refer to mutual funds in which a majority of the investment is directed towards equities. These investments involve greater risk, but also offer more returns. If you are looking to achieve long-term growth, you need to invest in equity funds. Equity funds may focus on one particular sector or they may include stocks from diverse sectors.

2. Debt funds

Another type of mutual funds, a debt fund invests in securities, debentures, and bonds. Since all of these schemes are debt instruments, the risk is relatively low. Similarly, the returns from such investments are low. If you are looking for safe investment options, debt funds are the correct choice for you. These investments will allow for a moderate growth of income, instead of huge earnings.

3. Balanced funds

Balanced funds act as a middle ground between debt and equity funds, as their portfolio is a blend of equities and debt. The objective for the investor is to achieve financial growth while keeping the risk low. The returns are stable and you can try to build your personal finances through investment in balanced funds.

4. Liquid funds and Money Market

These mutual funds offer shorter term for investments. They invest in schemes, such as commercial papers, treasury bills and more. The duration for investment is limited up to 91 days. The goal of investing in the money market is to attain greater liquidity with moderate returns.

5. Gilt funds

These funds invest in government securities. They involve no risk and are the safest type. However, the returns are extremely low from such investments.

Apart from these types, mutual funds can also be divided into growth and dividend options. In dividend funds, the return is distributed among the investors, while in growth funds the returns are reinvested into the scheme. Research online mutual funds, so that you get a better understanding of the various options.

Investment in stocks is risky and is difficult to navigate if you do not have comprehensive knowledge of the market. Therefore, for an average investor, mutual funds are the best option to foray into the market. Not only are mutual funds safer, but they also cost less and offer better savings on taxes. Here is all you need to know about mutual funds.

What is mutual fund?

Mutual funds are part of asset management companies who handle your investments so that you do not have to micro-manage them. For performing this service, mutual funds charge a nominal fee. Mutual funds offer the ideal option to those investors who like to invest but do not have the necessary knowledge about the markets.

How to invest money in mutual funds?

Investing in mutual funds is simple. You have to choose between two options when you want to invest. You can either invest directly or seek the assistance of a broker. If you invest directly, your money will be invested in the direct plan of the scheme. However, if you go through an intermediary, the investment will be on the regular plan of the scheme.

If you want to apply directly, you can do so by visiting the website of the particular mutual fund. You may also visit the offices of the company offering the scheme to enter in the scheme. Direct investment is better since you do not have to pay a commission to the advisor. However, direct investment can be tricky because you have to complete the entire process yourself. You would also need to keep a track about the scheme and how well it is performing.

Advantages of mutual funds investment

Now that you know how to invest money in mutual funds, you need to understand why you should invest in mutual funds. Here are some benefits of the same.

1. Diversification of risk

When you invest in mutual funds, your money is invested across diverse portfolios. Some of these assets may perform well, but others may not. However, since there is diversity in the investments, the risk is effectively lowered. In the case of investment in stocks, the risk would be much higher, since the price of the stock may fall leading to immense losses.

2. Initial capital can be very low

Mutual funds gather funds from a pool of investors. Therefore, each investor does not need to allocate a huge sum towards the investment in question. Diversified equity funds investment can be started at a low initial capital of Rs. 5,000. Some schemes may offer even lower minimum investments, even for diversified schemes.

3. Anyone can invest

Investment in stocks requires a great amount of expertise. Without this knowledge, you would very likely incur losses through such an investment. However, mutual funds are much simpler to navigate. Professional fund managers invest the money on your behalf, which reduces the risk involved with the investment. These fund managers choose the right stocks to invest in, leading to good returns.

If you are a first-time investor, mutual funds are perfect for you. Such schemes will not only help secure your finances but will also improve your understanding of the markets.

Like all other financial functionalities, mobile apps have been developed for investments as well. In India, several apps have been launched that allow investors to manage their investments effortlessly. However, some of these applications are simply better than others. Therefore, you need to choose an app that best matches your needs.

Here are some points to be considered before choosing a money investment app.

1. Direct or regular mutual fund plans

 Every penny earned through investments is an added bonus. Investors look to reap the maximum returns when they invest a sum of money over 10 or 15 years. With direct mutual funds investment, the returns are significantly higher than the returns from regular mutual funds. For instance, an investment of Rs. 5 Lakhs, at a 15 percent compounding interest for 15 years will result in Rs. 60.75 Lakhs in returns when invested directly.

If the same money is invested in regular mutual funds, the return would be limited to just over Rs. 52 Lakhs. Therefore, you need to choose a mutual fund investment app that offers you the option to invest your money directly.

2. A seamless sign-up procedure

Once you sign up for the app of your choice, you simply need to undergo a KYC verification. This can be done in a convenient manner and users need to enter the PAN ID in the webpage. Furthermore, if your PAN card is not KYC verified, you would need to verify it before you can start investing. The complete absence of paper and convoluted sign-up procedures, help newcomers sign up seamlessly.

3. Keep an eye on the market

Mobile investment apps allow you to start investing money on your own, without the help of financial advisors. However, it is important to consider the risks involved before investing. Since newcomers often use such apps, there is a high possibility that investments made through these apps can lead to losses. Therefore, make sure you consult financial advisors before investing through apps if you want to reduce the risk profile of your investments.

4. Investing on the go

The greatest benefit of money investment apps is that they allow investors to manage their investments on the go. Not only can they engage newer investments, but also keep an eye on their current investment portfolio. In fact, KYC verified users can invest money in under 10 minutes if they use any one of these apps.

5. Incorrect or biased information

Investment apps are helpful, but newcomers are susceptible to exaggerated information. Incorrect suggestions may cause these novice investors to misread the market and invest money in unfavourable schemes. Similarly, an incorrect impression might be formed on the mind of the investor due to incomplete information. For instance, some apps only show the performance of a particular fund for the last 1 year, instead of giving a full graph of its performance for the last 5 to 10 years.

Therefore, there are positives and negatives to using a mobile investment app. You should exercise caution while using these applications so that you do not erode the value of your investment.