In a dynamic universe of investing, opportunities come and go. You must have a strategy to capture the moment when it presents itself. That is where Small Cap Funds come in. Since Small Cap Funds tap into the potential of young and promising companies, you get the benefit of their growth if you stay invested long enough.
UNDERSTANDING THE CONCEPT OF MARKET CAPITALISATION SHALL MAKE IT EASIER TO KNOW SMALL CAP FUNDS
Market capitalisation is the aggregate value of a company which is derived by a multiplication of the total number of outstanding shares with the current price. For instance, if a company has 30 Lakh shares which are currently being traded at a market price of Rs.1,000 each, then the market capitalisation of the company is as illustrated below: 3,000,000 X 1,000 = Rs.300 CR
What is a Small Cap Fund?
Small Cap Funds are Open-Ended Equity Schemes that invest a minimum of 65% of its assets in Equity and Equityrelated instruments of Small Cap companies. As defined by SEBI, 251st company onwards by full market capitalisation are defined as Small Caps.
What Makes Small Cap Funds Lucrative?
Small Cap Stocks tend to carry growth potential and the ability to compound wealth over time as some of the Small Cap companies operate and cater to niche markets, thereby generating a high return on capital.
These Stocks are less tracked or under-researched by the analysts. Therefore, it provides the fund managers to benefit from higher growth potential by picking the quality Stocks over a period of time.
Given the high-risk nature of these funds, the Fund Managers endeavour to mitigate the risks by picking quality Stocks and by portfolio diversification.
These Funds may help balance an overall conservative portfolio and ride the potential upside from the underlying portfolio.
What You Need to Know About Taxation
Tax on Dividends
Initially, the dividends were Tax-free as the company declaring dividend paid Dividend Distribution Tax (DDT). But, the dividend proceeds are to be included in the annual income for the financial year and shall be taxed at the income Tax slab rates.
However, as per the Finance Act 2020, distribution of dividends is subject to Tax Deducted at Source (TDS) where the amount of dividend paid on or after 1 Apr 2020 exceeds Rs.5,000. The rate of TDS was fixed at 10%.
One of the relief measure declared by Government in the current COVID-19 pandemic is the reduction in the rate of TDS to 7.5% for the dividends distributed from 14 May 2020 to 31 Mar 2021.
Capital Gains Tax
The net gains that an investor makes at the time of redemption is known as capital gains. This gain is the difference between the sale value and purchase value, where the selling price exceeds the cost of purchase.
Broadly speaking, there are two types of gains, namely Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG).
When the units were held for less than one year before redemption, the gains derived are termed as STCG. On the other hand, the gains on holding the investments for 12 months or more are referred to as Long Term Capital Gains (LTCG).
STCG is taxable at a rate of 15%.
Whereas, LTCG up to Rs.100,000 is Tax-exempt. Gains exceeding the Tax-free limit are taxable at 10% without indexation.
Who Can Invest?
Small Cap Funds are a good option for investors who are –
Seeking higher returns relative to other Diversified Equity Funds and willing to ride the underlying portfolio volatility.
Looking to add a high risk strategy to balance an overall conservative portfolio construct with medium to long-term investment horizon.
Small companies offer value and growth. Besides, a Mutual Fund's professional Fund Managers team offers you the benefit of handpicked, fast-growing companies. To make long-term investments at reasonable costs, speak to your Mutual Fund Distributor to choose the right Small Cap Fund for you today.
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