Small-cap mutual funds often spark debate because they promise high growth but come with equally high volatility. These funds invest in companies that are still in their expansion phase—businesses that are innovating, entering new markets, or building operational scale. While such companies have the potential to deliver significant returns, they are also more sensitive to economic shifts, policy changes, and investor sentiment compared to large-cap stocks.

The key to evaluating small-cap funds is understanding their role within a diversified portfolio. They are rarely meant to be the core holding; instead, they function as growth enhancers alongside more stable large- and mid-cap allocations. By investing a controlled portion in small caps, investors can participate in emerging opportunities without exposing the entire portfolio to extreme volatility.