What are small cap mutual funds?

Sources:

Small cap mutual funds are investment funds that focus on companies with a relatively small market capitalization. Here’s a detailed explanation:

  1. Definition and Characteristics:

    • Small cap funds invest in companies that have a smaller market capitalization, typically ranging from around $300 million to $2 billion. These companies are considered to have more growth potential compared to mid-cap and large-cap companies because they are still in their developmental stages.
  2. Performance Expectations:

    • Historically, small cap stocks have the potential to provide higher returns. This is because smaller companies can grow much faster than larger ones. However, they also come with higher volatility and risk (1).
  3. Fund Variability:

    • Not all small cap funds are the same. The average size of companies included and how deeply discounted the companies are can vary significantly from one fund to another. For instance, some small cap value funds may have average company sizes of $1.8 billion, while others might be around $3 billion (2).
  4. Investment Strategies:

    • Small cap value funds are a specific category that aims to invest in small cap companies that are considered undervalued. These funds look for companies that are priced low relative to their intrinsic value, which can lead to higher returns if the companies' true value is realized (2).
  5. Choosing Small Cap Funds:

    • When selecting a small cap fund, it's essential to consider the fund's focus on either growth or value, the size of the companies it invests in, and its performance history. Some funds might also offer more exposure to certain industries or sectors, which may or may not align with your investment goals (2).
  6. Brokerage and Management:

    • Small cap mutual funds are often available through major brokerages and can be part of your IRA or 401K plans, although not all retirement plans offer them. They can be actively or passively managed, with differing fee structures (1).

To conclude, small cap mutual funds can be a valuable part of an investment portfolio, particularly for those looking for growth potential, assuming they are comfortable with the higher risk associated with smaller companies.

Small Cap Investing

Paul explains the advantages of investing in small cap companies within the parameters of index fund investing. Small cap companies have more room to grow and can provide the best of both worlds when investing in baskets of hundreds and thousands of them.

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