Small Cap Funds: 5 Things You Must Check Before SIP

Small cap mutual funds can deliver strong returns in good years, but they are risky and volatile. Before you start a SIP in any small cap fund, know exactly what you are signing up for.

Here's what happened: Bajaj Finserv's Small Cap Fund completed its first year with roughly 8.5% returns, outperforming its benchmark index.. Small cap funds invest in companies ranked below 250 by market capitalisation — higher growth potential but significantly higher volatility.. Several new small cap funds have launched in recent years as retail investor interest in equity mutual funds has surged sharply..

What you should do: Check your investment horizon first — only invest in small cap funds if you can stay invested for at least 7 years without touching the money.. Compare rolling returns over 3 and 5 years across established small cap funds, not just the latest 1-year performance number.. Limit small cap allocation to 10–15% of your total equity portfolio — balance it with large cap or flexi cap funds to manage risk..

A new fund's 1-year return means very little — small caps can spike in bull runs and crash 40–50% in downturns. Always check how a fund performed during 2020 and 2022 market falls before investing.