Micro Cap Mutual Fund

Small Cap Mutual Funds - Why they are always in demand?

Small cap mutual funds are essentially stock funds devised at maximizing returns or growth. The term small cap refers to the capitalization of a corporation in the stock market which is any where between $ 300 and $ 2 billion. This article covers:

-Are small cap mutual funds advantageous?
-What are the benefits in investing in investing in small cap mutual funds?
-What are micro cap mutual funds?

Of all the types of various mutual funds what are these small cap mutual funds? Why are they in news of late? It pays to understand term as applied to stock market first in order that we get an insight in to what small cap mutual funds are?

What are small cap stocks and what are small cap mutual funds?

The term small cap refers to the capitalization of a corporation in the stock market which is any where between $ 300 and $ 2 billion. The figure is debatable among brokerages. Also the classification is for convenience and broking purposes and hence is an approximation.

Small cap mutual funds are essentially stock funds devised at maximizing returns or growth. Thus, small cap mutual funds are those that focus the investment of their assets on small cap stocks. Small cap mutual funds need not necessarily spread their investment across the spectrum of small cap market as the name might suggest. On the contrary they have the liberty and sanction both from the shareholder and law to compartmentalize select stocks and sectors within the class.

Do Mutual Funds Have A Free Hand In Investing In Small Cap Market?

By and large mutual funds have free market access subject to SEC guide liens. Like in any other sector, be it index stocks or the large cap stocks, mutual funds can have the freedom to choose stocks from here in any proportion. But it does not mean that they can invest in large volumes in small cap stocks. This restriction is imposed by SEC (Securities and Exchanges Commission) and is to facilitate retail distribution rather than large volume acquisition by institutional investors.
Prospects of Investing In Small Cap Mutual Funds
Small cap funds and micro cap funds are relatively less stable in comparison to other types of mutual funds owing to their narrow focus and limited presence by volume in the market. Also they lay a lot of weightage to small cap stocks which means that when market is not in its best, the funds values can plummet as they are directly connected to markets.

If this were the only case, why do you think the market is raising hype and hoopla about small cap mutual funds? Alternately, small cap mutual funds have a great potential due to a couple of reasons.

Small cap stocks and thus small cap mutual funds generate a lot of demand driven sales at the counters in bullish market pushing up the prices. The converse is also true for a bad day.

Historically small cap companies are found to be reinvesting most of their profits in to business reassuring its share holders a better performance and profit potential.