How Can You Generate Wealth by Investing in Small Cap Nifty 50 Fund?

Small-cap companies are young, growing businesses that offer significant growth potential. While investing in individual small caps can be risky, a diversified allows you to tap into this growth potential while reducing risk. This article will explore how this fund can help you generate wealth over the long run.

The Potential of Small Caps

Small-cap companies are in the early stages of their lifecycle. Unlike large, established companies, these young businesses have ample room to grow their revenues, profits, and valuation multiples. As they turn into mid-caps and then large caps over time, early investors stand to make handsome returns.

However, investing in individual small caps can be risky due to higher volatility and lack of transparency. This is where diversified mutual funds from small-cap space comes into the picture.

Benefits of Small Cap Index Funds

A small-cap index fund exposes small caps' growth potential while reducing risk through diversification. Here are some of the key benefits:

• Invests in a basket of high growth small cap companies across various sectors
• Offers much-needed diversification to balance the risks in small caps
• Low-cost fund due to passive investing approach
• Transparent portfolio and performance benchmarked to a small-cap index
• Potential to generate inflation-beating returns over the long term
• Could start investing with a relatively small amount

Wealth Creation with Long-Term Investing

History shows that equity investments have beaten inflation and most other assets by a wide margin in terms of returns generated over long periods. Small caps have often generated the highest returns within equities, fueled by their rapid growth. As a general rule of investing, the higher the risk, the higher the potential rewards from equities over 7-10-year periods.

By investing in a small-cap index fund through systematic investment plans (SIPs), you can create significant wealth over the long run. Assuming a 12% CAGR return, a monthly SIP of 5,000 can grow to around 50 lakhs in 20 years through the power of compounding and regular investing. Even with more conservative return assumptions of 8-10% CAGR, the investment corpus would still grow substantially over two decades.

Managing Risks

It must be noted that small caps tend to be more volatile than large caps in terms of short-term price fluctuations. However, this volatility gets smoothed out over long-term horizons of 7-10 years, which is the ideal investment timeframe for small-cap funds. Further, instead of making lump sum investments, adopting SIPs spreads your investments evenly across various market cycles and reduces risk through rupee cost averaging.

The organised structure and transparency of small-cap index funds make them a relatively safer way to benefit from the higher return potential of small-cap equities over the long run.

An Overview of Aditya Birla Sun Life Nifty Small-cap 50

The Aditya Birla Sun Life Nifty Small-cap 50 fund is an open-ended scheme that invests in a portfolio mirroring the Nifty Small-cap 50 Total Return (TRI) index. This index comprises the top 50 small-cap companies chosen based on full market capitalisation from the Nifty Small-cap 250 index. It is a transparent, rules-based index with diversified industry exposure.

Investing in this fund benefits equity market-linked returns potential and risk mitigation through investing in the top 50 small-cap stocks. The fund aims to provide portfolio diversification along with long-term wealth creation opportunities.

Key Benefits of Investing in Aditya Birla Sun Life Nifty Small-cap 50

Mentioned below are the various benefits you get from investing in Aditya Birla Sun Life Nifty Small-cap 50:

1. Superior Growth Potential: History shows that small-cap stocks have delivered high returns within the equity segment over long periods. The ABSL Nifty Small-cap 50 fund allows you to tap into this high growth.

2. Diversification: This fund exposes 50 high-quality small-cap players spread across sectors and market capitalisation. The major sector holdings of these funds are in companies like Suzlon Energy Ltd. (9.65 %), KPIT Technologies Ltd. (5.71 %), APL Apollo Tubes Ltd. (4.76 %), Apollo Tyres Ltd. (4.64 %) –

Note – Holdings data as on 14^th June’24

3. Liquidity: The fund structure offers very high liquidity. You can also enter and exit conveniently.

4. Transparency: The underlying index portfolio methodology and construction are rules-based and transparent. Fund performance is also benchmarked to the well-established Nifty Small-cap 50 TRI.

The Bottom Line

The ABSL Nifty Small-cap 50 fund offers long-term investors a transparent, diversified, and cost-efficient vehicle to potentially generate inflation-beating returns. By tapping into the higher growth potential of small caps through route of index funds, investors can accelerate their wealth creation journey and build a sizable corpus over long horizons. Allocate a portion to this fund for supercharged equity portfolio returns.

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