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What Is a Small Cap Mutual Fund?

what-is-a-small-cap-mutual-fund

ANSWER:

A small cap mutual fund is a mutual fund that focuses on buying the stocks of companies below a certain market capitalization.

 

The stock market has been terrible the last decade. Stocks have been flat or even lost money. When pundits talk about stocks, they are usually talking about the largest companies in America, and they have struggled lately. However, what they most often do not mention is the performance of small companies. In fact, many times when large company stocks are treading water, the smaller companies are actually earning money and the stocks are appreciating.

So What Is Small Cap?

Small cap companies are companies with relatively smaller market capitalization in the stock world. Large companies have market capitalizations (value) upwards of $15-20 billion. Small caps generally are found in the range less than $10 billion and more often less than $5 billion.

What Is a Small Cap Mutual Fund?

Mutual funds are investments where many people pool their money to purchase a basket of assets. Sometimes the investor is picking an index that tracks the performance of every company that fits specified criteria. Other times, mutual fund managers actively pick and trade stocks or assets that they believe will outperform the overall market. A small cap mutual fund is a mutual fund that focuses on buying the stocks of companies below a certain market capitalization.

What Are the Benefits of Small Cap Mutual Fund?

Small cap stocks have outperformed large companies during periods of financial unrest. These smaller companies may not have the debt of their larger brothers and may be better positioned to weather periods of difficulty. In addition, some of the macroeconomic forces that may harm large firms may have very little effect on small companies. Small company stocks may also be riskier. They don’t have the large customer bases or access to capital. However, by purchasing a mutual fund of small companies, you are diversifying your risk over many companies so that even if one fails, your investment in that one company is relatively small and your overall investment is minimally affected.

 

Resources

“Small-Cap Stocks | Small-Cap Investing.” Fool.com: Stock Investing Advice | Stock Research. N.p., n.d. Web. 8 Dec. 2010. http://www.fool.com/investing/small-cap/2010/02/04/buffett-wishes-he-could-buy-these-stocks.aspx.

“Advantages of the Small Cap Mutual Fund – Financial Web.” Financial Web – The Independent Financial Portal. N.p., n.d. Web. 8 Nov. 2010. http://www.finweb.com/investing/advantages-of-the-small-cap-mutual-fund.html.

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