Small-Cap Funds are a type of Equity Fund that invests primarily in the stocks of small-cap companies. These firms are small-sized concerning market capitalisation but have excellent potential to grow into large-cap businesses. This lets them deliver profitable returns to investors, enabling them to build wealth in the long run.
Meaning of Small-Cap Funds
Small-Cap Funds allocate at least 65% of their pooled investment corpus to Equity and Equity-related instruments of small-cap firms. The SEBI lists the top companies and makes rules for the investment portfolio of various funds. Small-cap companies rank beyond the top 250 companies listed by the regulatory authority. These companies often are unheard of.
However, experienced fund managers search the stocks of small-capitalisation companies continuously performing in the market and invest in them. These are usually firms that can become big businesses in the future while delivering profitable returns to investors.
Features
The important characteristics of the top Small Cap Mutual Funds include the following:
These funds can deliver reasonably higher returns under favourable conditions since they have more room to grow.
While these Equity Funds provide high returns as shares of small-cap companies may multiply in a short time, they are associated with increased risk. Hence, investors should have a high-risk appetite when opting for these funds.
When investing in these Mutual Funds, you need to have a long-term investment horizon, say, 10 years or more. These funds require time to outshine the financial market and generate reasonable returns.
You can invest in Small-Cap Equity Funds, like the DSP Small-Cap Fund, by making Lumpsum Investments. Alternatively, you could invest a small sum at fixed intervals through Systematic Investment Plans. However, be disciplined to continue the SIP for a longer tenure.
How are these funds taxed?
When you invest in Small-Cap Mutual Funds, your returns are subject to two types of taxes. These include the following:
Dividend distribution tax
The dividend distribution tax applies to the dividend received. As a result, fund houses deduct DDT at 10% before paying it out.
Capital gains tax
Capital gains are the profits you earn when you redeem the fund units. Hence, when you sell your investment in a Small-Cap Mutual Fund, you are expected to pay capital gains tax. The holding period, i.e., how long you stayed invested in the fund, determines the rate for this tax.
When the holding period for the fund is less than one year, gains are classified as Short-Term Capital Gains. This earning is taxed at 15%.
On the other hand, if you held the fund for more than a year, your gains are classified as Long-Term Capital Gains. LTCG of up to Rs. 1 lakh annually is not taxable. However, any profits beyond that are taxed at 10% without indexation.
