Small cap mutual funds are typically invested in well-established companies. It is best advised to diversify your investments by investing in other financial instruments apart from the stock market to reduce your risk. The idea is that if you have one type of financial instrument doing well, then it’s likely that other instruments would do well too. So when you invest in small-cap mutual funds, it’s a way of diversifying your portfolio to spread the risk. Small cap mutual funds have proved to be a prevalent investment choice because of their high return on investment.
Before investing in small-cap funds, analyze your portfolio, your risk tolerance and decide how much you are willing to lose. If you want a conservative portfolio that you are okay with losing, stick with stocks and bonds. The growth rate of each sector is likely to stay the same. Stocks will likely grow faster than bonds and vice versa. If you think that the market may react negatively to your investment, hedge your position by investing in small-cap mutual funds. A portfolio consisting of small-cap stocks will be in safer waters than having a portfolio based on bonds and stocks.