During the bull market, small-cap growth funds have been consistent winners. They’re the top-ranked U.S. stock fund category over the past one-, three- and five-year periods.
Small-cap growth funds have posted an average annualized return of 14.9 percent over the past five years, compared with 12.2 percent for large-cap growth funds.
Even though investing in small companies can be risky, investors are still on board. Small-cap growth funds attracted a net investment of almost $2.8 billion in the first eight months of this year while investors withdrew a net $17.7 billion from large-cap growth funds, according to Morningstar.
In an economic recovery, small companies can be attractive.
They can react faster to changes in the business environment and grow faster. But be aware that they thrive when interest rates are low and they’re able to access lower-cost loans.
When interest rates rise, investors should reassess the mix of assets in their portfolios.
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