If you want to know about small cap index funds, you are at a right place.
Do you know 2,400+ companies are listed on the NYSE? Every company is tagged as a large company, mid-cap company, and small-cap company, based on its market capitalization. The first 100 companies in terms of full market capitalization, while being termed as large caps, next 101st to 250th company will be termed as a mid-cap, and 251 to onwards in terms of full market capitalization will be termed as small cap. But do you know what market capitalization and small-cap index funds are? Let’s discuss.
PRECAP:
What is market capitalization?
What is a small cap index fund?
Who should invest in small-cap index funds?
Factors considered before investing in a small cap index fund.
How to invest in small cap index funds?
What is market capitalization?
It is the aggregate market value of a company represented in a dollar amount. In simple words, market capitalization presents the market value of a company, it is computed based on the current market price of its 1 share and the total number of the outstanding shares.
Formula:
Market capitalizations = market price of 1 share * the number of outstanding shares.
Example:
ABC private Ltd company with 20 million shares selling at $50 a share would have a market cap of $1 billion.
What is a small cap index fund?
Small cap fund companies have a market capitalization between $300 million to $2 billion. While the bulk of this category is composed of relatively young companies.
Small Cap opportunities are best suited for investors who are willing to accept higher risk in exchange for large possible benefits. Small companies are more likely to be bankrupt than big companies.
Characteristics of small cap index fund
- They invest in small-cap companies like small start-ups and low-revenue companies that are in the early stages of development.
- They invest in companies that have a high potential for growth in the future.
- Small cap funds are volatile.
- They are not financially stable
- Small cap funds are risky.
Who should invest in a small cap index fund?
As we read above, small-cap funds are volatile so investors should consider investing in these funds only if they are planning to stay invested for 7 years or longer.
These funds are best for investors who are willing to accept higher risk in exchange for large possible benefits. Because small Cap Funds invest in small start-up companies that have the potential to grow rapidly.
also read: CAGR Meaning In Stock Market
Factors considered before investing in a small cap index fund.
The small cap index fund is full of risk, that is why there are some factors that you need to consider before investing in a small cap fund.
Long term:
Always choose to invest for the long term with a small cap index fund because the minimum period for which you should be investing in a small cap index fund is 7 and more years.
Size:
It is very hard to find some investment options in a small cap index fund but make sure the fund’s size is not so large. When you have a large fund then it becomes extremely challenging
Risk appetite:
If you have fear about your investments during a bad phase in the market, it means that you do not have the necessary risk appetite to invest in a small cap fund.
Bear market effect:
Small-cap funds depend on the volatility and performance in the bear market and down market. These funds usually give better results in a good market.
Revenue growth:
Sales growth is important for small-cap funds because younger companies should be able to provide more revenue growth than large-cap funds.
How to invest in a small cap index fund?
Step 1.
Log into an official website and enter your personal, professional, and financial details (as they asked).
Step 2.
Find the small-cap fund you want to invest.
Step 3.
Upload your documents like aadhar card, pan card, and other id proof, if they ask to upload.
Step 4.
Click on Invest Now, and enter the amount and mode of investment that you want.
Step 5.
Invest in your chosen small cap index fund carefully after analyzing it from every angle.
The top small cap index fund
Here are some top small cap funds in the U.S. As you can see from the below list, small-cap investing doesn’t have to be complex. The four index fund ETFs offer a range of benefits, including income growth, and value and all have solid track records.
| S. no | funds | ticker | Expenses ratio |
| 1 | Ishares russell 2000 growth ETF | NYSEMKT: IWO | 0.24% |
| 2 | Ishare core S&P small cap ETF | NYSEMKT: IJR | 0. 06% |
| 3 | Schwab U.S small cap ETF | NYSEMKT: SCHA | 0.04% |
| 4 | Vanguard small cap value index ETF | NYSEMKT: VBR | 0.19% |
Conclusion
Small companies are more likely to be bankrupt than big companies so if you are willing to accept a high risk then a small cap index fund is for you. You should invest only after gaining enough knowledge and guidance about market capitalization and small-cap index funds.
FAQs
Que1. What is the disadvantage of a small cap index fund?
-Small cap index funds have low liquidity.
-That’s why low liquidity reduces their usability.
-They have many growth opportunities but these funds come with a high amount of risk.
-Small and new start-up companies can be highly volatile.
Que 2. What is the advantage of a small cap index fund?
-One of the important advantages of the small-cap index fund is its high growth potential.
-Small cap companies offer higher growth potential than large companies.
-Small-cap companies tend to be more flexible than large companies.
-Small-cap companies tend to be more focused.
Que 3. Are small-cap funds a good investment?
Small-cap index funds are very risky so if you are willing to accept a high risk then a small-cap index fund is best for you