Definition of Small-Cap Mutual Funds
Small-cap mutual funds own the stocks of companies valued at less than $1 billion, though some financial firms stretch the definition to include companies valued up to $2 billion, according to Financial Web. Since the typical large-cap mutual fund owns the stocks of companies valued at more than $10 billion, small-cap funds help you diversify your investment dollars by holding smaller companies with high growth prospects.
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Identification
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Small-cap funds can be defined by investment style, which includes growth, value and blend. For example, small-cap growth funds focus on companies that are making money faster than other companies in their industry or sector, as well as the stock market in general.
Small-cap value funds hold the stocks of companies with slightly slower growth. These companies typically are undervalued by the market and thus appear to be good values when purchased at current stock prices. Small-cap blend funds hold both growth and value stocks to achieve gains now from the growth stocks and over the long term from value stocks.
Global Exposure
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You can also find small-cap international funds that hold the stocks of small, non-U.S. companies. These funds combine stocks from around the globe or focus on a particular region, such as Europe or Asia. Certain small-cap funds even focus on a single country, such as Japan. Depending on the regional focus, small-cap international funds can carry more risk than a U.S. small-cap fund while potentially providing greater gains.
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Types of Management
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Like other mutual funds, small-cap funds operate with either an active or passive management style. An actively managed fund follows a specific strategy and frequently buys and sells securities to earn greater returns. A passively managed fund, also called an index fund, chooses a stock market index and then simply buys and holds the same stocks the index holds, so performance usually keeps pace with the index.
Expenses And Purchasing
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You pay annual expenses to own a small-cap fund. When rolled together, these expenses, which cover a fund's operating costs, are known as an expense ratio. The ratio is expressed as a percentage, usually between 0.5 percent and 1.5 percent or more; at the end of each calendar year, managers withdraw the expense-ratio percentage from the fund's total assets.
You can buy shares of a small-cap mutual fund online via a discount brokerage firm or a mutual fund company. You must open an account and fund it before you can invest. After you've made an initial purchase, you can set up recurring contributions via the online system.
Micro-Caps
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In addition to the small-cap fund, there's an even smaller class of investment called the micro-cap fund. Micro-cap funds hold stock in companies valued at less than $250 million, according to Financial Web. And while small-cap funds are considered more volatile than large- or mid-cap funds, micro-cap funds are even more so, especially during turbulent markets.
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