Investors have turned their backs on micro-cap funds recently. According to Greg Brown of Morningstar, though, there are some benefits to adding micro-caps to a portfolio if you know what to look for.
The main benefit of owning a micro-cap fund, Brown says, is diversification. “It’s one of only a few free lunches in the investing world,” he says. “By combining uncorrelated asset classes you can lower risk and increase returns.” Look for funds with low turnover rates, and some funds will charge high fees to make up for small asset bases, he warns. He also suggests choosing funds that check their asset base before it grows out of hand.