How to Invest in Small Cap Mutual Funds

Small cap companies have a 'small' market capitalization, usually from $250 million to $2 billion. Some mutual funds are based on capitalization, focusing solely on large-cap, mid-cap, small-cap and even micro-cap companies. While the lion's share of mutual funds invest only in large-cap companies, some focus on small-cap companies, and this is often where the surprise gems can lie.

Instructions

Difficulty: Moderately Challenging

Things You’ll Need:

• Computer

1. Understand the risks of small cap companies and the mutual funds that invest in them. While there are great deals to be found, there will nearly always be greater risk associated with small cap companies.
2. Look at the top-performing small cap mutual funds on Yahoo! Finance. Start by selecting "Mutual Funds" from the blue menu on the left of your screen.
3. Click "Top Performers"; underneath the "Tools" menu on the left side of your screen.
4. Click "Small Blend", "Small Growth" or "Small Value" to see the top performing small cap mutual funds.
5. Request a prospectus from any of these funds.
6. Read each prospectus carefully.
7. Take some time to watch the main indices for small cap companies: the Russell 2000 Index, the Russell 2500 Index and the Russell Small Cap Completeness Index.
8. Choose the mutual fund that appears to have the most consistent returns. Do this by comparing the performance charts in each fund's prospectus.
9. Make your investment. You can call a reputable broker or contact the small cap mutual fund of your choice directly.

Tips & Warnings

• Do your research well in order to take advantage of the upside of small caps--there are many undervalued companies out there.
• If you're an experienced investor and you find some great small cap opportunities during your research, consider investing in them yourself if a mutual fund is unable to give you access to them.
• Most investors with money in small caps have put it there themselves. Don't get mixed up between small cap investments and small cap mutual funds.
• Don't simply jump into small caps because you've heard they're great. Understand why they make sense for you as an investor.
• You want to know the investment industry pretty well before putting all your money in small caps, even if it's through mutual funds. Small caps can often fly under the radar of analysts, leaving them undervalued and ripe for investment, but it takes a savvy investor with time to spare to take advantage of this.