Small-cap mutual funds: How much should you invest? Experts recommend 10-20% allocation, warn against excessive exposure

Small-cap mutual funds: allocation guidance

Small-cap mutual funds invest in smaller listed companies that may eventually grow into mid-cap or large-cap businesses. That growth potential, however, comes with sharper volatility. Market experts quoted in a recent report suggest treating these schemes as a satellite holding rather than the core of an equity portfolio, with allocations typically ranging between 10% and 20% of total equity exposure.

Allocation depends on goals, not age

Rahul Jain of Nuvama Wealth Management said investors with high risk appetite and a horizon exceeding five years may consider small-cap funds within their equity portfolio. For most investors, a 10-15% allocation offers segment exposure without excessive vulnerability to market swings. Vaibhav Porwal of Dezerv suggested 10-20% for most portfolios, with 25% as an upper limit, comparing small-cap allocations to strong spices: a controlled quantity improves the outcome, while excess spoils it. He added that investment timelines and tolerance for downside, not age alone, should drive the decision. Vaibhav Chugh of Abakkus Mutual Fund also recommended 10-15%, stressing assessment of individual risk profiles.

Why it matters for businesses

For companies raising capital, small-cap fund flows influence liquidity and valuation in the smaller end of the listed market. For advisers, distributors and compliance teams, the guidance reinforces suitability and risk-disclosure obligations when recommending such products. First-time investors need not start with dedicated small-cap funds. Experts suggest building a diversified base through flexi-cap, multi-cap or index funds first. Jain said a flexi-cap fund, which spreads investments across market capitalisations based on conditions, offers some small-cap exposure without requiring a dedicated scheme. Porwal noted that smaller companies attract less analyst and institutional coverage, which can create opportunities for active fund managers to spot und…