Mad Rich

Micro cap mutual funds or small cap mutual funds are stock funds planned to maximize returns or growth. The term micro cap alludes to the capitalization of a corporation in the stock market. The amount is anything between $50 million and $300 million. This figure can be debated amongst the brokerages. The classification is for convenience and broking purposes. So, it is an approximation.

Features

Micro cap mutual funds focus the investment of their assets on micro cap stocks. These funds need not compulsorily spread their investment across the spectrum of micro cap market. In the opposite, these funds have the freedom and authority from the shareholder and law to distinguish select stocks and sectors from within the class. Usually, mutual funds have free market access subject to SEC guidelines. Similar to other sectors like index stocks or the large cap stocks, mutual funds have the freedom to select stocks in any ratio. However, this does not indicate that investment in large volumes is possible in micro cap stocks. Such a restriction has been imposed by Securities and Exchanges Commission (SEC). The objective is to make retail distribution easy when compared with large volume acquisition by institutional investors.

Prospects

Micro cap funds are relatively less stable in comparison to other types of mutual funds. The reason is that they have a narrow focus and less presence by volume in the market. Also, there is lot of weightage on the micro cap stocks. This implies that when the market is not at its best, the fund values can fall sharply since they are directly connected to markets.

Potential

Micro cap mutual funds have a good potential due to these two reasons. The first is as follows – Micro cap stocks and consequently micro cap mutual funds create a lot of demand driven sales at the counters in a confident market where the prices are shooting upwards. The opposite is true for a bad day. The second is as follows – it has been observed that micro cap companies are reinvesting a majority of their profits in to the business. In this way, it is reassuring the share holders a better performance and profit potential.

Micro cap mutual funds are assigned a particular stock market limit beyond which they cannot be invested. Usually, micro cap mutual funds form a part of up to 4/5th in very small stock companies. The funds usually consist of between 0.7 and 0.8 of the net assets in equities. The risks are very high and so are the costs.

Those who are not afraid of possible loss and those who are on the lookout of quick profit are advised to invest in micro cap mutual funds. However, it is also recommended to invest for shorter spans of time. A different issue to be considered is that whether the investor is investing in micro cap mutual funds only or has a well diversified portfolio. It has been observed in history that the most reputed micro cap mutual funds have yielded to the market forces. Even a little movement can collapse the market and the mutual funds all of a sudden.