What is a small cap index fund?
A small cap index fund is a type of equity mutual fund that invests in a basket of small-cap companies. Small-cap companies are typically defined as those with a market capitalization (the total value of all outstanding shares) of less than ₹10,000 crores.
Small cap index funds aim to replicate the performance of a small-cap index, such as the NIFTY Smallcap 250 Index. This means that the fund will invest in the same stocks as the index in the same proportions.
Why invest in a small cap index fund via SIP for 1 year?
There are several reasons why you may want to consider investing in a small cap index fund via Best SIP Plan for 1 year:
- Capital appreciation potential: Small cap companies have the potential to generate higher returns than large cap and mid cap companies over the long term. This is because they are typically growing at a faster rate and are not as well-known by investors.
- Averaging cost: SIP allows you to invest a fixed amount of money at regular intervals, regardless of the market conditions. This helps you to average out your purchase price over time.
- Power of compounding: Compounding is the process of earning interest on interest. When you invest in a small cap index fund via SIP, your returns are reinvested into the fund, which allows your earnings to grow exponentially over time.
- Disciplined investing: SIP is a disciplined way to invest. It helps you to invest regularly, even when the market is volatile.
Here are some additional benefits of investing in a small cap index fund via SIP for 1 year:
- Diversification: Small cap index funds offer broad diversification across different sectors and industries. This helps to reduce your overall risk.
- Liquidity: Small cap index funds are liquid, meaning that you can easily buy and sell units of the fund.
- Transparency: Small cap index funds are transparent, meaning that you can easily track the performance of the fund and its portfolio.
Benefits of investing in a small cap index fund via SIP for 1 year
Here are some of the benefits of investing in a small cap index fund via SIP for 1 year:
- Potential for high returns: Small cap companies are typically growing at a faster rate than large cap and mid cap companies. This means that they have the potential to generate higher returns over the long term.
- Rupee cost averaging: SIP allows you to invest a fixed amount of money at regular intervals, regardless of the market conditions. This helps you to average out your purchase price over time. This is especially beneficial when investing in volatile markets, such as the small cap market.
- Power of compounding: Compounding is the process of earning interest on interest. When you invest in a small cap index fund via SIP, your returns are reinvested into the fund. This allows your earnings to grow exponentially over time.
- Disciplined investing: SIP is a disciplined way to invest. It helps you to invest regularly, even when the market is volatile. This is important for building wealth over the long term.
Here is an example of how rupee cost averaging and compounding can work to your advantage:
Let’s say you invest ₹1,000 per month for 1 year in a small cap index fund. The NAV of the fund is ₹100 at the beginning of the year.
| Month | NAV | Units purchased | Value of investment |
| 1 | 100 | 10 | ₹1,000 |
| 2 | 110 | 9.09 | ₹1,000 |
| 3 | 120 | 8.33 | ₹1,000 |
| 4 | 130 | 7.69 | ₹1,000 |
| 5 | 140 | 7.14 | ₹1,000 |
| 6 | 150 | 6.67 | ₹1,000 |
| 7 | 160 | 6.25 | ₹1,000 |
| 8 | 170 | 5.88 | ₹1,000 |
| 9 | 180 | 5.56 | ₹1,000 |
| 10 | 190 | 5.26 | ₹1,000 |
| 11 | 200 | 5 | ₹1,000 |
| 12 | 210 | 4.76 | ₹1,000 |
Total investment: ₹12,000
Value of investment at the end of 1 year: ₹12,835
This example shows how rupee cost averaging and compounding can help you to grow your wealth over time, even if you are investing a small amount of money each month.
How to choose the best small cap index fund for SIP
When choosing a small cap index fund for SIP, you should consider the following factors:
- Track record: Look at the fund’s track record over the past 3-5 years. This will give you an idea of how the fund has performed in different market conditions.
- Expense ratio: The expense ratio is the percentage of your investment that is used to cover the fund’s operating expenses. A lower expense ratio means that more of your investment will go towards growing your wealth.
- Investment strategy: Understand the fund’s investment strategy. Some small cap index funds invest in a broad basket of small-cap stocks, while others focus on investing in a specific sector or industry.
Top 5 small cap index funds for SIP in 2023
Here are the top 5 small cap index funds for SIP in 2023, based on their track record, expense ratio, and investment strategy:
- ICICI Prudential Smallcap Index Fund
- Quant Small Cap Fund
- Kotak Small Cap Fund
- Union Small Cap Fund
- Nippon India Nifty Smallcap 250 Index Fund
These funds have a good track record of performance and a low expense ratio. They also invest in a diversified basket of small-cap stocks, which helps to reduce risk.
Additional tips for choosing the best small cap index fund for SIP
- Consider your investment goals and risk appetite: Before investing in any fund, it is important to consider your investment goals and risk appetite. Small cap funds are more volatile than large cap and mid cap funds, so they are suitable for investors with a high risk appetite and a long-term investment horizon.
- Compare different funds: Once you have shortlisted a few funds, compare them on the basis of their track record, expense ratio, and investment strategy. You can use websites like ValueResearch and Morningstar to compare different funds.
- Read the fund’s prospectus: The fund’s prospectus is a legal document that contains all the important information about the fund, such as its investment objectives, investment strategy, and risk factors. It is important to read the prospectus carefully before investing in any fund.
