Investing today is not as easy as it seems. Whether investing directly in stocks or through mutual funds, all forms require a considerable amount of research and effort to choose the right stocks or funds, manage them, and earn returns. In the case of mutual funds, it becomes difficult for a person if the chosen fund fluctuates according to market conditions. Yes! We are talking about small cap mutual funds. These funds are too volatile in nature and could easily leave their investors baffled by their constant fluctuations.
But one should not be risk averse and turn away from funds in this category. The most important thing for investors to understand is that investing in stocks carries risk that changes depending on 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.
Since the past three years, we have witnessed exceptional results from small cap funds that have attracted too many investors. However, some investors who are risk averse assume that these mutual fund investments are cake in the sky for obvious reasons. For these investors we have some tips that can be taken into account before investing in these mutual funds.
- Investigate it
It is a known fact that a fund’s past performance does not guarantee its future performance. But that doesn’t mean you shouldn’t do some preliminary research on your investment strategy, fund manager, past performance, etc., before investing in it. Certainly, if you want to get good returns by investing in small-cap funds, you should spend enough time doing your research.
- The long-term investment horizon is the objective
As discussed above, small-cap funds are highly volatile in nature and tend to fluctuate regularly with the bear and bull market phases. 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 have to invest for an extended period of 5-10 years.
- All eggs in one basket, NO!
Diversification is a broad term that when applied to investing means buying more than one type of equity instrument. Diversifying a portfolio helps spread risk and minimize losses. Because sticking to a single investing style that makes you hold onto only small-cap funds could leave you at a loss when the market turns down. A well-diversified portfolio that contains a mix of stocks can help you enjoy the gains even when these funds fall.
- Time to market-NO, time to market-YES!
Market timing has been considered a silly activity by many of the financial industry experts. Timing to 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 the sentiments of the market, therefore driving it up and down. Therefore, the best way is to stay away from the habit of timing the market and start your investments as early as possible with a long-term goal.
- Appropriateness of the investment philosophy
The investment philosophy followed by the fund must be in line with the portfolio’s objectives. This aspect of investing is very important during times of greatest volatility. As an investor, staying patient in the moment of the market hit is very difficult, 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 a particular market condition, but if you take the advice above into account, investments in these funds will also be beneficial to 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.