Why Avoid Small Cap Mutual Funds

Mutual funds are largely retail investment products.They are more suitable for saving money rather than make it grow at astonishing rates.They are largely targeted at middle class investors.However wealthy investors too continue to invest in mutual funds.The advantages of getting professional investment management and not  having to deal with researching stocks , trading and tracking a portfolio is too much to give up. However mutual funds investing exclusively in small cap companies are not very popular with more sophisticated investors.This is because mutual funds are not the best way to invest in small cap companies.

Consider this: There are 62 funds in Value Research’s Mid and Small Cap category. Of these, no more than six are either exclusively or primarily focused on small-cap stocks. These funds have had a patchy performance with a large amount of volatility and have been unable to give attractive returns even over relatively long periods of time. Of course, volatility is a given in any small cap portfolio because smaller companies tend to react violently to any change of mood. However, the whole idea is that the investment manager will eventually be able to build a decent base of investments in a set of small-cap companies that are on their way to growing out of the category and into being mid-cap companies. Here lies the problem. If a knowledgeable and expert investor were to do this directly, he would probably identify a handful of companies and then would slowly build positions in them.

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